Standard Cost Formula

Standard Cost Formula (Table of Contents)

• Formula
• Examples

What is the Standard Cost Formula?

The term “standard cost” refers to that branch of cost accounting that helps in the preparation of cost budget for manufacturing companies based on estimated cost and quantities. The standard cost covers all types of costs that include direct material, direct labor, and manufacturing overhead. In other words, the standard cost is the financial plan of manufacturing of a single unit of output which is based on predetermined costs and quantities of inputs anticipated during a specific period of time. The formula for standard cost can be derived by multiplying the standard rate of manufacturing with the required standard quantity of input. Mathematically, it is represented as,

Examples of Standard Cost Formula (With Excel Template)

Let’s take an example to understand the calculation of Standard Cost Formula in a better manner.

Standard Cost Formula – Example #1

Let us take the example of a company that is engaged in the manufacturing of widgets. Based on available historical costing information, the cost accountant has determined that for producing a single unit of widget the company requires 5 pounds of input material and 2 hours of labor. The input material costs $50 per pound while the labor charges $35 per hour. Calculate the estimated overall cost for manufacturing 5,000 widgets based on the given standard estimates for the amount and cost of input material and labor.

Solution:

Standard Cost is calculated using the formula given below.

Standard Cost = Standard Cost of Input Material * Standard Quantity of Input Material + Standard Rate of Labor * Standard Hours of Labor

• Standard Cost = $50 per pound * 5 pounds + $35 per hour * 2 hours
• Standard Cost = $320 per widget

Therefore, the standard cost for manufacturing a widget is $320.

Overall Estimated Cost is calculated using the formula given below.

Overall Estimated Cost = No. of Widgets * Standard Cost

• Overall Estimated Cost = 5,000 * $320
• Overall Estimated Cost = $1,600,000

Therefore, the overall estimated cost for manufacturing 5,000 widgets is $1.6 million.

Standard Cost Formula – Example #2

Let us take the above example to understand the process of standard costing. Let us assume that the manufacturing of a single unit of the widget requires two input materials, A and B. One widget requires 4 pieces of input material A that costs $15 per piece and 3 pounds of input material B that costs $40 per pound. On the other hand, a widget requires 2 hours of labor costing $35 per hour and an overhead cost of $70 per widget. Calculate the standard cost of manufacturing a widget based on the given standard estimates for the amount and cost of input.

Solution:

Standard Cost is calculated using the formula given below.

Standard Cost = Standard Cost of Input Material A * Standard Quantity of Input Material A + Standard Cost of Input Material B * Standard Quantity of Input Material B + Standard Rate of Labor * Standard Hours of Labor + Standard Overhead Cost

• Standard Cost = $15 per piece * 4 pieces + $40 per pound * 3 pounds + $35 per hour * 2 hours + $70
• Standard Cost = $320

Therefore, the standard cost for manufacturing a widget is $320.

Explanation

The formula for standard cost can be computed by using the following steps:

Step 1: Firstly, select the type of cost among direct material, direct labor and manufacturing overhead.

Step 2: Next, determine the standardized unit of rate to express the selected type of cost. In the case of direct material, the preferred unit of rate can be a dollar per kg or dollar per piece, while it can be a dollar per hour for direct labor.

Step 3: Next, the standard quantity of the selected type cost can be estimated based on available consumption information of the past.

Step 4: Next, determine the standard rate on the basis of the company’s past data and available current market rates.

Step 5: Finally, the formula for standard cost can be derived by multiplying the standard rate (step 4) of manufacturing with the required standard quantity (step 3) of input as shown below.

Standard Cost = Standard Rate * Standard Quantity

Relevance and Use of Standard Cost Formula

It is one of the very important concepts for the cost department because the variances of the actual cost from the standard cost are treated as an effective management tool. In case there is a variance, the management becomes aware and takes the required steps to mitigate the deviation to bring it in line with the planned costs. In fact, it is considered to be a favorable deviation if the actual costs are less than the standard costs, while it is unfavorable the other way round. However, it should be kept in mind that standard cost is useful for the repetitive type of production and finds limited use in case of a non-repetitive type of production.

Recommended Articles

This is a guide to Standard Cost Formula. Here we discuss how to calculate Standard Cost along with practical examples. We also provide a downloadable excel template. You may also look at the following articles to learn more –

1. How to calculate Manufacturing Overhead
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4. Calculation of Common Stock Formula