Difference.Between.Actual cost and standard cost
Answers
Answer:
Standard costs are the estimated please costs for products that are predetermined and arise from the units of material, labor and other costs of production for the specific time period. Actual costs refer to the costs that are actually incurred. It’s the realized value and is not an estimate. The most common methods of Actual Costing in manufacturing units .
Every company and segment within a business prepares a budget for costs and an estimate for revenue streams at the beginning of the financial year. The actual numbers are recorded throughout the year. At the end of the financial year, the actual costs incurred are then compared with the standard costs, as was put in the budget plan, and the variance is derived. The same approach is taken for revenue as well. Standard cost vs actual costs are terms used in management costing and are used frequently in those terms.
Key Differences Between Standard Cost vs Actual Cost
Let us discuss some of the major differences between Standard Cost vs Actual Cost:
1. Standard costs are the estimated costs pertaining to labor, material and other costs of production. Actual Costs, on the other hand, are those realized during the period and compared at the end of the period.
This difference between the standard cost vs actual cost is termed as Variance. If the Actual cost is higher than the standard it creates an unfavorable variance
2. The standard costs are inclusive in the net sales amount and is therefore not a part of the financial statements. On the other hand, actual costs are realized during the same period but
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Actual Cost
Meaning Standard cost refers toa the estimated costs of a product pertaining to material, labor, and other overhead costs. The actual cost is the realized cost and is not based on the estimates of the same.
Accounting Treatment Standard Cost cannot be included in the financial statements of a company Actual Costs are shown as an expense in the financial statement
Recording the Costs These costs are recorded at the beginning of the year when the budget is planned These costs are incurred and realized during the entire year and recorded in the same manner.
Accuracy of Data Capture In case of any errors in data capture, the inventory valuation does not change but shown as Variance In case of errors in data capture, would lead to distorted costs and actual inventory valuation
Visibility of Issues Method of cost using standard costs provides better visibility and chances to improve the performance, as the variances can be useful to identify the issues in the production and manufacturing process In the method of costing using Actual costs, certain issues can be hidden by capitalizing them with the cost of the inventory
Conclusion –
Standard Costing method requires to work on them every year or for every period the management decides as. Also, the variance that is observed after the actual costs needs to be monitored and check the accuracy of the standards decided. On the other hand, the actual costs need not be decided on an annual or periodic basis. The changes in the costs are decided on an ongoing basis. The method of costing to apply for the inventory entirely depends on the management and its style. While it might be recommended by many that actual costing is better when compared as it is more liberating, offers more options, readily available information and ultimately more flexibility, but there also be some thoughts around standard costing practices being more usable and better. On the basis of the standard costs, it becomes easier to attract bank loans and also make plans well in advance for the unit based on the estimated costs.
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Answer:
Explanation:
A standard cost is a pre-determined or pre-established cost to make a unit of finished product. ... Actual cost is the actual cost of direct materials, direct labor, and overhead to make a unit of product. The difference between actual cost and standard cost is called variance