It is a predetermined cost, as it is determined in advance what should be the cost of production. When standard cost is used for the purpose of cost control it is known as standard costing. Now the question arises what is standard cost? Standard cost means cost based on the technical estimate of material, labour, overhead for a specific period of time under specific working condition.
Standard costing is the preparation of standard cost and verifies the difference between standard costing and actual cost and tan find out the variation between the two.
It usually has following steps:
1) Ascertaining the standard cost
2) Measuring the actual cost
3) Comparing the actual cost with standard cost to find out the difference between the two
4) Reasons for variation taking corrective action to maximize production
We cannot ignore actual cost while using standard cost as standard cost is complementary to actual cost. It is used in all types of industries but mainly in the industries of repetitive nature like engineering.