Standard cost refers to the estimated cost to manufacture a product or perform a service under normal conditions, based on factors such as material costs, labor rates, and overhead allocations. It is used in cost accounting to compare against actual costs incurred, highlighting variances for analysis.
For example, if a company anticipates the cost to produce a widget is $10 based on historical data and planned efficiencies, this cost becomes the widget's standard cost. If the actual production cost results in $12 per widget, the variance indicates inefficiencies or changes in input prices, prompting management to investigate and address the differences to control costs effectively.
Standard costing aids in budgeting, setting performance benchmarks, and decision-making, making it a vital element of managerial and financial accounting tools.