Using Standard Costs to Help Manage Costs

A Standard Costing System is one tool a company can is use to help manage costs. In a Standard Costing System, actual costs in the production process are compared against the standard (budgeted) cost. The difference between actual cost and standard cost is called the Cost Variance. These cost variances are examined to find out the reasons for the differences between actual versus standard costs. The differences can be favorable or unfavorable. The standard unit cost for an item is the sum of the direct material, direct labor, and factory overhead costs for producing one unit of the product.