Learn about the difference between difference between Standard Cost and Historical Cost.
The meaning of ‘Standard Cost’ will be more illuminating to us if a line of distinction is drawn between ‘Standard Cost’ and ‘Historical Cost’.
The following are the points of distinction:
Standard Cost is determined and recorded before actual performance while Historical Cost is related to the past transactions i.e. the financial transactions are recorded after the actual performance.
(ii) High Degree of Efficiency:
Standard Cost is an ideal cost which can be attained under normal conditions. But Historical Cost is actual and real cost i.e. it is related to past. On the other hand, Standard Cost is a predetermined cost related to future.
(iii) Evaluation of Efficiency:
Standard cost serves as a measure of evaluation of efficiency since it helps the management to compare the budgeted cost with that of actual cost. Historical fails to provide any such technique.
(iv) Cost Control:
Standard cost is very important for cost control but Historical Cost fails to provide any technique for cost control. Since it fails to make any comparison and fails to provide any yardstick for pointing out the possible causes for rises in cost. Standard cost can be used as an yardstick for pointing out the centre of responsibility through the analysis of variations.
(v) Planning and Control:
Historical cost has its own value and carries historical significance. The actual financial position of the concern is made known through it. But it has no practical significance. It is not helpful to the management for planning for variance purposes and control. But standard cost is considered to be an effective managerial tool of cost control, future planning.