Standard Cost vs Actual Cost

Difference Between Standard Cost vs Actual Cost

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.

Standard costs are the estimated costs for products that are predetermined and arise from the units of material, labor 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).

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 pertaining to labor, 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

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 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, but there also be some thoughts around standard costing practices being more usable and better. On the basis of 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.

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