For any given product or unit the following standards must be determined.
- Standard material costs.
- Standard labour costs.
- Standard direct costs.
- Standard variable overhead costs
- Standard Fixed over head costs.
- Standard selling prices and profit.
The standard direct material cost is found by multiplying the quantity of materials to be purchased with the rate of price at which they are available.
Determination of standard labour cost involves fixations of
(a) Standard labour grades
(b) Standards labour times i.e., standard hours through time, motion and fatigue study with the help of work study engineers and
(c) Standard wage rates based on the time rate, piece rate and premium plans.
Standard direct cost is any expenditure which is directly to be incurred on a specific cost unit. It is charged directly to the particular cost standard concerned.
Standard overhead costs are classified as manufacturing, administration, selling, and distribution over heads. They are also classified as fixed, variable and semi variable so that current estimate for each class may be prepared for the budget period. Standard overhead rate is determined on the basis of past records and future trend of prices.