Definition
Standard cost is a predetermined cost set for each item, used to value stock and cost of sales, with any difference from the actual purchase cost recorded separately as a variance.
What is standard cost used for?
Standard costing keeps stock values stable and makes buying performance visible. If the standard is EUR 40 and a receipt costs EUR 42, the extra EUR 2 a unit goes to purchase price variance rather than into stock. Standards are usually reviewed once or twice a year.
A receipt above standard
Example- Received: 500 units at EUR 42
- EUR 21,000
- Added to inventory at the EUR 40 standard
- EUR 20,000
Purchase price variance
EUR 1,000
Standard costing suits businesses with stable, predictable prices; out-of-date standards make variances pile up and stock values misleading.