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23.6 Explain How and Why a Standard Cost Is Developed

Standard Costs​

Standard cost: A pre-determined cost for a product or service based on expected prices and quantities.

Purpose:

  • Establish cost benchmarks
  • Simplify budgeting and cost control
  • Facilitate variance analysis
  • Encourage efficiency

Types of Standards​

  • Ideal Standards: Perfect performance (no waste, no downtime)
    • Motivational but often unrealistic
  • Practical Standards: Allow for normal inefficiencies
    • More realistic and achievable

Developing Standard Costs​

Steps:

  1. Analyze past performance
  2. Consider future expectations (inflation, efficiency improvements)
  3. Consult with production and purchasing teams
  4. Set materials, labor, and overhead standards
  5. Review and approve

Components:

  • Standard Quantity: Expected amount of materials/labor
  • Standard Price/Rate: Expected price or wage rate
  • Standard Overhead Rates: Based on expected activity

Example: Standard Cost for Signature Dish​

  • Standard materials: €8 per dish (based on recipe and supplier prices)
  • Standard labor: 0.2 hours × €25/hour = €5
  • Standard overhead: 0.2 hours × €15/hour = €3
  • Total standard cost: €16 per dish

Updating Standards​

Standards should be reviewed regularly (annually or when major changes occur) to ensure accuracy.

Luxembourg Compliance Note​

Standard costs help Luxembourg SMEs manage high input costs (rent, labor) by setting expectations and identifying variances. Standards must reflect Luxembourg wage laws and social charges.

Think It Through​

What are the risks of using outdated standard costs? How might they affect budgeting and decision-making?