Standard Cost vs Actual Cost

Difference Between Standard Cost vs Actual Cost

Standard costs are the estimated costs for products that are predetermined and arise from the units of material, labour and other costs of production for the specific time period. Actual costs refer to the costs that are actually incurred. It’s the realized value and is not an estimate. The most common methods of Actual Costing in manufacturing units are – First In First Out (FIFO), Average Costing and Last In First Out(LIFO).

Every company and segment within a business prepares a budget for costs and an estimate for revenue streams at the beginning of the financial year. The actual numbers are recorded throughout the year. At the end of the financial year, the actual costs incurred are then compared with the standard costs, as was put in the budget plan, and the variance is derived. The same approach is taken for revenue as well. Standard cost vs actual costs are terms used in management costing and are used frequently in those terms.

Head To Head Comparison Between Standard Cost vs Actual Cost (Infographics)

Below is the top 5 difference between Standard Cost vs Actual Cost

Key Differences Between Standard Cost vs Actual Cost

Let us discuss some of the major differences between Standard Cost vs Actual Cost:

1. Standard costs are the estimated costs of labour, material, and other costs of production. Actual Costs, on the other hand, are those realized during the period and compared at the end of the period.

This difference between the standard cost vs actual cost is termed as Variance. If the Actual cost is higher than the standard, it creates an unfavorable variance.

2. The standard costs are inclusive in the net sales amount and is therefore not a part of the financial statements. On the other hand, actual costs are realized during the same period but later than the date of sales made. Hence, a separate entry needs to be done in the book of accounts- financial statements.

3. Under standard costing, the stock or inventory is valued at any predetermined or pre-established cost and any variances are expensed as manufacturing variances these costs are added up to the costs of products going for production, and, hence, is used to establish the price of the finished good. Under actual costing, these costs are the actual manufacturing costs and as well show the final production cost – but this does not drive the total inventory value, unlike the standard costs.

Standard Cost vs Actual Cost Comparison Table

Let’s look at the top 5 Comparison between Standard Cost vs Actual Cost

A basis of Comparison	Standard Cost	Actual Cost
Meaning	Standard cost refers to the estimated costs of a product about the material, labour, and other overhead costs.	The actual cost is the realized cost and is not based on the estimates of the same.
Accounting Treatment	Standard Cost cannot be included in the financial statements of a company.	Actual Costs are shown as an expense in the financial statement.
Recording the Costs	These costs are recorded at the beginning of the year when the budget is planned.	These costs are incurred and realized during the entire year and recorded in the same manner.
Accuracy of Data Capture	In case of any errors in data capture, the inventory valuation does not change but shown as Variance.	In case of errors in data capture, would lead to distorted costs and actual inventory valuation.
Visibility of Issues	Method of cost using standard costs provides better visibility and chances to improve the performance, as the variances can be useful to identify the issues in the production and manufacturing process.	In the method of costing using Actual costs, certain issues can be hidden by capitalizing them with the cost of the inventory.

Conclusion

Standard Costing method requires to work on them every year or for every period the management decides as. Also, the variance that is observed after the actual costs needs to be monitored and check for the accuracy of the standards decided. On the other hand, the actual costs need not be decided on an annual or periodic basis. The changes in the costs are decided on an ongoing basis. The method of costing to apply for the inventory entirely depends on the management and its style. While it might be recommended by many that actual costing is better when compared as it is more liberating, offers more options, readily available information, and ultimately more flexibility. Still, there also be some thoughts around standard costing practices being more usable and better. Based on the standard costs, it becomes easier to attract bank loans and also make plans well in advance for the unit based on the estimated costs.

Recommended Articles

This has been a guide to Standard Cost vs Actual Cost. Here we also discuss the Standard Cost vs Actual Cost Key Differences with Infographics and Comparison Table. You may also have a look at the following articles to learn more –

1. Difference Between Costs vs Expenses
2. Cost of Debt Formula
3. Debt vs Equity
4. Loan vs Mortgage