What is the primary function of standard costing?

The primary function of standard costing is to assign expected costs and analyze variances. Standard costing involves setting predetermined costs for various manufacturing elements, such as materials, labor, and overhead, based on historical data, market conditions, or best practices. This allows businesses to establish benchmarks for performance.

Analyzing variances is a critical aspect of this process. It involves comparing the actual costs incurred with the standard costs assigned. The differences, or variances, can highlight areas where the business is performing well or where it may need to improve. For instance, if the actual costs are significantly higher than the standard costs, this may indicate inefficiencies or other issues that require management's attention.

This approach not only aids in budget preparation but also provides a way to measure operational efficiency and control costs effectively, guiding managers in making informed decisions. Such insights from variance analysis help in strategic planning and operational adjustments, which are essential for maintaining competitiveness and improving profitability.