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Standard costing is used to compare predetermined costs with actual costs to analyze performance and make decisions in businesses.
Standard costing is applied in situations where predetermined costs are compared to actual costs to analyze performance and make decisions. It involves setting predetermined costs based on factors like labor, material, and overhead costs. If actual costs vary from standard costs, variances are calculated and analyzed to understand the reasons for deviations.
For example, if a company sets a standard cost of [tex]$5 for producing a unit of a product but actually incurs $[/tex]6 per unit, a favorable or unfavorable variance is identified and investigated. Standard costing provides a benchmark for cost control and performance evaluation in businesses.
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