Standard Cost Accounting

Standard cost accounting is the most widely used type of cost accounting. It is widely used because it requires the least amount of effort and cost to implement and maintain. The standard cost is the cost that it should take to produce the part or service at the time the standard was created.

Standard cost accounting contains three cost elements: direct labor cost, material cost and burden cost. These three elements make up the costs for all parts and services in cost accounting

Direct Labor Standards:
Standard direct labor costs are created for each part or service by determining what the current costs are for direct labor to produce the part or service.

So, if we have two operators and we pay each operator $10 per hour, and both operators together can make 10 parts per hour, then the direct labor cost is $2 per part. We can then make $2 our standard for this part.

Material Standard Cost:
Material standards are usually set at what the material costs on January 1st of the current year. The standard is usually not changed for the entire year. The reason for this is that it is then possible to look at the current cost of material and compare it to the standard to see how much inflation or deflation there has been.

Burden Standard Costs:
Burden costs are all the other costs that are not direct labor or material. These include employee benefit costs, salary labor, rent, taxes, supplies, etc.

Burden cost standards are created and applied to individual work centers and the parts and services by a Cost Accountant who will determine the best way to do this. Standard burden costs may be developed by determining the number of direct labor employees on a work center, or the area consumed by a work center.

There are many ways to develop standard burden costs, but the end result should be a burden cost for the part or service that closely resembles what costs are actually being consumed to produce the part or service. Burden costs usually are a very large cost and time should be taken to ensure that these standard costs are reasonable.

Standard cost accounting costs are not actual or current costs, but what the cost of the part or service is when the standard was developed. It is useful to keep the standards the same all year and only change the standard at the beginning of the next year. This is so that all the cost elements of a product or service can be analyzed to determine if costs are improving or increasing.