What is standard costing used for?

Standard costing is used primarily for assigning expected costs to products and services. This method involves setting predetermined costs for various inputs in the manufacturing process, which can include materials, labor, and overhead. By establishing these standards, organizations can budget more effectively, control costs, and assess performance.

When standard costing is applied, actual costs incurred can be compared against these predetermined standards, allowing businesses to identify variances – or differences – between expected and actual costs. This analysis plays a crucial role in managerial accounting as it helps managers make informed decisions regarding production efficiency, pricing strategies, and cost control measures.

Additionally, the use of standard costing aids in variance analysis, where managers can pinpoint the causes of deviations from expected costs, contributing to better operational and financial planning. In essence, standard costing provides a systematic approach to cost management, promoting efficiency and accountability in financial reporting and performance evaluation.