Question

Difference between std cost of std hours and std cost of actual hours is

Answer 1

Step-by-step explanation:

Standard and Actual Costs

In the context of a manufacturing firm, a standard cost is a pre-determined or pre-established cost to manufacture one unit of product. A standard cost has the components of the cost of direct materials, direct labor, and overhead to make one unit. Companies have a so-called standard cost card for each product which shows the standard quantities and standard costs of inputs to make a particular unit of product.

In business, there are two categories of standards - the ideal standards and the practical standards. Ideal standards assume perfect operating conditions. Here, normal production inefficiencies are not taken into account. Machine breakdowns, downtime, employee errors, break periods, etc. are not considered. As a result, standard costs under this category are very tight and, most often, are difficult to meet. Practical standards, on the other hand, consider these normal and reasonable production inefficiencies. Hence, the resulting standard costs are quite tight, yet attainable.

The process of establishing standard cost is quite tedious. It requires inputs from people performing various functions in the organization from purchasing, engineering, production, and accounting. Often, the company's historical records of production inputs and purchase prices are very useful in the standard cost setting process.

Actual cost, as the term implies, is the actual cost of direct materials, direct labor, and overhead to make a unit of product. It is the historical cost of resources given up to make an item.

Standard Versus Actual Cost

The difference between standard and actual cost is called variance. If actual cost is higher than the standard cost, the variance is unfavorable. This means that the company spends more in terms of the actual manufacturing cost components - items like materials, labor, and overhead - than the determined pre-established standard costs for manufacturing that product. Conversely, if actual cost is lower, the variance is favorable. That is, the company is able to make savings on some or all of the components of manufacturing cost.

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