# Standard Costing — Introduction
## Definition
Standard Costing is a cost-control technique used by management to compare what costs ought to have been (the standard / budgeted cost) with what costs actually were, and to investigate the difference.
## Standard vs. Actual
| Standard Cost | Actual Cost |
|---|---|
| The cost to be incurred as per Budget / Plan | The cost actually incurred for production |
| Set in advance based on engineering studies, past data, expected efficiency, expected prices | Recorded after the production period from actual transactions |
## Variance
A variance is the difference between Standard Cost and Actual Cost.
$$\text{Variance} = \text{Standard Cost} - \text{Actual Cost}$$
- Favourable (F): Actual cost is less than standard ⇒ saving.
- Adverse / Unfavourable (A or U): Actual cost is more than standard ⇒ overspending.
## Illustration
- Plan (Standard): Produce 100 units, each needing 2 kg of raw material at ₹1/kg.
- Standard cost = 100 × 2 × 1 = ₹200
- Actual: Produced 110 units, each using 2.1 kg, purchased at ₹0.90/kg.
- Actual cost = 110 × 2.1 × 0.90 = ₹207.90
- Variance ≈ ₹7.90 (Adverse) (Note: in formal variance analysis, the comparison is Standard Cost of Actual Output vs. Actual Cost of Actual Output — see the detailed Material and Labour variance lessons.)
## Why Standard Costing Matters
- Highlights deviations so management can take corrective action.
- Encourages cost consciousness across departments.
- Forms the basis of performance evaluation and responsibility accounting.
- Useful for pricing decisions and budgetary control.
## Types of Variances (Tree)
```
VARIANCES
|
┌─────────┴─────────┐
Cost Variances Sales / Profit Variances
|
┌───┼───┐
Material Labour Overheads
```