Learn about the comparison between Standard Cost and Estimated Costs.
Estimated costs are intended to ascertain what the costs will be while standard costs aim at what costs should be.
Estimated costs are calculated on the basis of past performance being adjusted in the light of anticipated changes in the future. Standard costs, on the other hand, are ascertained on a scientific basis keeping in view certain conditions of efficiency.
(iii) Aid to Management:
Estimated costs are not helpful to management in accomplishing management functions as they are not scientifically predetermined costs. But standard costs involves operational analysis and evaluation and a comprehensive review of internal and external factors. They become reliable yardsticks for product costing, product pricing, planning, co-ordination and price control purposes.
Estimated costs put emphasis on cost with which it is compared at the end of the accounting period. If the estimated costs are found higher or lower than actual costs, they are revised for the use in the next accounting year. In standard costing the emphasis is put on standard costs, i.e., what costs of material labour and overhead should be incurred if the factory is to be operated as a highly efficient unit.
Under standard costing, actual costs are ascertained only to facilitate their comparison with standard costs.
The estimated costs are used only as a statistical data, whereas standard costs are used as a regular system from which variances are ascertained and the reasons for such variances are analysed and corrected measures are taken promptly.
Estimated cost is adjusted to the actual cost and expected changes in the coming period. While Standard Cost is not generally revised unless it has been set incorrectly or it has become irrelevant to the changed situations. Thus, Standard Cost is free from frequent changes or modifications.
(vii) Barometer of Efficiency:
Estimated Cost—being only an expression of likely cost in the future—cannot be used to measure the efficiency or otherwise. But standard cost is used as a barometer of efficiency since it is compared with actual cost.