Question

How do companies determine and use standard costs?

Answer 1

Standard cost can be used as to set cost and compare it with actual cost incurred. The variances from the standard cost can be reviewed and act accordingly. Standard costing helps to avoid unnecessary cost to the company and there by the company attains competitive advantage. For each cost driver company can derive standard cost such as direct material cost, direct labor cost, and various overhead costs. The managers should work according to the cost structure budgeted. This will provide optimum utilization of resource because including labor. For each company the management should set standard according to selling price and demand for the product. Other factors of internal and external cost should be looked into. Techniques such as Target costing, Total quality management , just in time etc may be used.