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Chapter 15
Standard costing
1.1 What is standard costing?
In the budgeting chapter we looked at the preparation of budgets within an
organisation. These budgets were prepared at a total level and became a target
against which actual results could be measured.
In this chapter we will look at another control technique known as standard costing.
Standard costing also produces a target against which we can measure actual
results, but in standard costing the targets are set at a unit level.
A standard cost is a carefully pre-determined unit cost which is
prepared for each cost unit.
The standard becomes a target against which performance can be
measured.
The actual costs incurred are measured after the event and compared
to the pre-determined standards.
The difference between the standard and the actual is known as a
variance. Analysing variances can help managers focus on the areas
of the business requiring the most attention. This is known as
management by exception.
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