Which inputs are used to calculate a standard cost?

• A. Efficiency levels, expected prices, budgeted overhead costs and activity levels
• B. Actual costs only
• C. Market demand forecasts only
• D. Historical costs without adjustments

Answer: (A)

Standard costs are built from planned, pre-determined allowances for what inputs should cost and how efficiently they should be used. The inputs you use to set these standards include the efficiency level (how much input is allowed per unit of output), the expected prices for materials and labour (standard price or rate), and the budgeted overhead costs along with the activity level used to derive the overhead absorption rate. By combining these, you establish a standard cost per unit for each element (material cost = standard price × standard quantity; labour cost = standard rate × standard time; overhead allocated using the budgeted amount and expected activity). These standards then serve as benchmarks for planning and variance analysis.

The other options don’t fit because actual costs are used when calculating variances, not to set the standard itself; market demand forecasts aren’t used to determine standard costs; and historical costs without adjustments don’t provide the forward-looking, efficiency-based allowances that standard costing relies on.