A standard costing system is a common way to budget for planned projects, managing costs in a production run and evaluating those costs after the production has finished. This system has the benefit of giving a business hard numbers to use when creating estimates for customers. However, there are problems associated with standard costing, especially when a business is new and has no history from which to base its estimates or when a company is beginning a new production process.

## Understanding Standard Cost Accounting

Before an accounting period has started, estimate the costs of a planned production process. Determine the amount of materials required and their cost as well as the amount of labor required and that cost. This can be broken down into three costs:

• Standard direct materials costs multiplied by standard quantity of those materials
• Standard direct labor costs multiplied by standard hours worked
• Standard overhead costs, including fixed costs and labor

To estimate standard costs before a production begins, you can use the past costs of similar production runs, engineering estimates, employee input and motion studies.

## An Example of Calculating Standard Costs

Suppose you run a T-shirt printing business and a client asks for 1,000 shirts of a specific quantity to be printed with three colors. You could develop a standard cost based on the costs of the shirts and ink, the cost of labor and the amount of time required to process and print the shirts. If this is your first production run for a new company, you would have to contact wholesalers to get estimates for the material costs. To estimate labor costs, you would have to rely on your own experience and the experience of your employees. To calculate overhead costs, like the cost of your equipment lease, building lease and other monthly expenses, you could divide those costs to get the daily rate and then multiply that daily rate by the number of days you estimate the project to take.