What is a standard cost (or expected)?

• A. A budget for marketing
• B. An estimated unit cost, prepared in advance and calculated from management expectations of efficiency levels in the use of materials and labour; expected price of materials, labour and expenses; budgeted overhead costs and activity levels
• C. A measure of output in a product
• D. A plan for overtime

Answer: (B)

A standard cost is the estimated cost to produce one unit of a product, set before production begins. It is prepared in advance using management’s expected efficiency in using materials and labour, the anticipated prices of those inputs, and budgeted overhead costs and activity levels. This creates a benchmark that helps with planning and cost control, because actual costs can be compared to the standard to identify variances in materials, labour, and overhead. By using standard costs, budgets can be built from these expected costs, and management can focus on why actual costs differ from the plan. The other descriptions describe a marketing budget, a measure of output, or a plan for overtime, none of which are fixed standard unit costs.