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Standard cost is an important subdivision of cost accounting and it includes all the cost associated with manufacturing company’s costs of direct labour, manufacturing overhead and direct material. These costs are used by the company to understand the actual cost of the product. However, selling cost of the product is not the actual cost but the expected costs relevant to those goods.
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Components of standard cost
The cost component structure is important as it determines how the result of material costing is updated. It groups the costs for each material according to cost component (such as internal activities, external activities, material costs and overhead). If a material is used in the construction of another material, the cost component split (which breaks down the costs according to internal activities, external activities, material costs and overhead etc) and remains in the system when the costs or expenses are rolled up.
The cost component also defines if the cost of the material is fixed or variable. It specifies if the cost is manufacturing cost or sales and administration cost. It decides if the costs are relevant for stock valuation, tax inventory valuation and commercial inventory valuation. Based on the costs, management can split the cost components and check if the cost can be decreased for any section to increase the profit of the organization.
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