The Basic Theory of Standard Costs.

Abstract The principal characteristic which distinguishes standard cost systems of ac- counting from older cost systems is the use of standard costs in addition to actual costs. The introduction of standard costs is but another step in the process of establishing complete control over all factors which are subject to the influence of management. A current standard is one which is intended to be representative of what cost actually should be under the prevailing circumstances. It is generally regarded as a real cost to be carried through the books of account and into the financial statements. A basic standard is, on the other hand, intended to serve only as a yardstick with which both expected and actual performance can be compared. When basic standards are applied, it is necessary to use current standards also, but current standards can be used without basic standards. The reason for this is that a basic standard by itself does not necessarily represent what performance ought to be in a given period but serves only as a base from which to measure changes. In order to realize the principal benefits from standards, it is essential that the standards be reasonably attainable goals.