One of the main functions of management accounting is to accumulate information about the performance of a business in a manner which expedites management decisions. In evaluating that performance, it is helpful to management if a standard has been developed with which to compare actual performance. A standard cost is a predetermined estimate of what the cost of a function, activity, product, or portion of a product should be if future operations go according to plan. Predetermined standards are useful, particularly in a manufacturing operation, in aiding management to control costs and to improve performance. The subject of setting and using standards is discussed in this chapter.


  1. Distinguish between a standard and a budget. Both standards and budgets are predetermined costs. The primary difference is that a standard is a unit amount, whereas a budget is a total amount. A standard may be regarded as the budgeted cost per unit of product.
  2. Identify the advantages of standard costs. Standard costs offer a number of advantages. They (a) facilitate management planning, (b) promote greater economy and efficiency, (c) are useful in setting selling prices, (d) contribute to management control, (e) permit “management by exception,” and (f) simplify the costing of inventories and reduce clerical costs.
  3. Describe how companies set standards. The direct materials price standard should be based on the delivered ...

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