{"id":8889,"date":"2023-03-29T15:25:32","date_gmt":"2023-03-29T19:25:32","guid":{"rendered":"https:\/\/www.sage.com\/en-ca\/blog\/?post_type=sage_glossary&p=8889"},"modified":"2026-02-18T08:03:11","modified_gmt":"2026-02-18T13:03:11","slug":"what-is-standard-costing","status":"publish","type":"sage_glossary","link":"https:\/\/www.sage.com\/en-ca\/blog\/glossary\/what-is-standard-costing\/","title":{"rendered":"What is standard costing?"},"content":{"rendered":"
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Standard costing is an accounting method used by manufacturers to estimate the expected costs of a production process for the coming year. Standard costing is a subtopic of cost accounting<\/a>, with the primary difference being that cost accounting assigns \u201cstandard\u201d costs, rather than actual costs, to its cost of goods sold (COGS) and inventory. Manufacturing companies use cost accounting for estimating various expenses including direct material, direct labor, or overhead.<\/p>\n\n\n\n

For managers looking to create a more precise budget, standard cost accounting can be a very useful tool. After all, a business that has accurate budgets is generally in a better position to be successful and effective. Thanks to a standard costing system, managers will have a projected idea of spending costs and can compare standard costs to actual costs, which can help guide strategic decision-making around things like implementing new business practices.<\/p>\n\n\n\n

How to calculate standard costing<\/h3>\n\n\n\n

To calculate standard costs, you add your estimated direct materials costs, labor costs, and manufacturing overhead. These costs form the baseline from which you measure actual costs. The difference is a variance, and this variance can be favorable (the actual cost was less than the standard cost) or unfavorable (the cost actual cost was high than the standard cost).
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Pros and cons of standard cost accounting<\/strong><\/h3>\n\n\n\n

The biggest advantage to using standard cost accounting is that it helps create more precise budgets, but there are other reasons a manufacturer might use standard costs. These include:<\/p>\n\n\n\n