Ministry of Higher Education, Science and Innovation Tashkent State University of Economics

Understanding standard and actual costing 
Standard costing is a method of cost accounting that establishes 
predetermined costs for items such as labor, materials, and overhead expenses. These 
predetermined standards are then used to compare actual costs incurred in producing 
a product. The goal of standard costing is to define and document the expected costs 
and profitability of producing a particular product or offering a specific service. 
In product work services, standard costing works by creating a set of 
assumptions about the cost estimates involved in producing a product or providing 
a service. These cost estimates are then used to compare actual costs incurred. The 
cost estimates might include direct costs, such as materials and labor, and indirect 
costs such as overhead expenses. For example, let's say a bakery produces cakes. To 
establish standard costing, the bakery defines the cost of the ingredients and labor 
required to produce a single cake, along with the overhead cost of running the 
bakery. Then, as the bakery produces cakes, it compares the actual costs incurred in 
the process to the pre-established standards. 
If the actual costs incurred are lower than the standard costs, the bakery is 
performing better than anticipated. Conversely, if the actual costs are higher than the 
standard costs, it might indicate a problem that needs to be addressed, such as 
inefficiencies in the production process. Standard costing provides an opportunity to 
identify areas of improvement and make changes to increase profitability. 
Standard costing is a useful tool in product work services because it provides 
a framework for estimating costs and comparing those estimates with actual results. 
Cost drivers are the factors that directly or indirectly cause costs to be incurred in a 
business. Identifying and managing cost drivers is a crucial part of standard costing. 
Cost drivers influence different cost components, including direct costs, indirect 

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costs, and overhead costs. In standard costing, the cost of a product can be traced 
back to the cost driver that caused it. For instance, in a manufacturing firm, direct 
labor hours or machine hours might be used as cost drivers. These drivers determine 
the amount of time it takes to produce goods or services. When estimating standard 
costs, the firm determines the standard rate per hour for direct labor or machine 
usage, which is the cost driver. In this case, the cost driver for the direct labor or 
machine usage is the time spent producing the goods. 
Similarly, in a services firm, cost drivers might include the number of 
transactions, the number of employees, the number of customers, or the number of 
service hours. These drivers could affect the cost of service production, and the 
standard rate per unit is calculated for each cost driver. The use of cost drivers 
enables businesses to understand the relationship between the cost of goods or 
services and the factors that cause it. It provides businesses with insights into which 
costs are directly related to the production of goods or services and which ones are 
indirect. By tracking cost drivers
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, businesses can use standard costs to identify 
inefficiencies in their processes and allocate resources more effectively. Therefore, 
cost drivers are essential in standard costing as they enable businesses to identify the 
root causes of cost variances between actual and standard costs, thereby improving 
efficiency, cost reduction, and overall profitability. 
Standard costing is a valuable tool used in various industries, such as 
manufacturing and service companies, to control costs and improve profitability. In 
service industries, standard costing offers the following benefits: 
Cost control: Standard costing helps service industries to control costs by 
setting reasonable standards for different aspects like labor cost, material cost, 
1
https://ca.indeed.com/career-advice/career-development/what-are-cost-
drivers#:~:text=Tracking%20cost%20drivers%20can%20help,revenue%20from%20products%20and%20services. 

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overheads, and other expenses. This helps service providers to determine the fair 
cost of service, plan and control expenditures, and manage the budget. 
Better decision making
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: With standard costing, service industries can analyze 
past performance, identify the areas of improvement, and make informed decisions 
that result in improving marginal efficiencies, reducing overhead costs, and 
increasing profitability. 
Performance measurement: Standard costing creates an opportunity for 
service industries to compare actual performance against the predetermined 
standards. This helps to identify the variances and deviations from the standard costs, 
and take corrective actions, if necessary. 
Increased efficiency: Standard costing facilitates better monitoring of 
resources utilization, productivity, and efficiency in delivering services. By 
measuring the performance and controlling cost, service providers can consistently 
improve service quality and standardized delivery experience to customers. 
Facilitates pricing strategy: Standard costing plays a crucial role in 
determining the pricing strategy for services based on the resources utilized, service 
type, and other overhead costs. This helps service providers to price their services 
accurately, calculate break-even point, and optimize their profit margins. In 
conclusion, standard costing is essential in service industries as it helps to control 
costs, improve decision making, measure performance, increase efficiency, and 
facilitate pricing strategy. 
Actual costing is a cost accounting method that calculates the actual costs 
incurred by a business in producing a product or offering a service. In actual costing, 
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https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/three-keys-to-
faster-better-decisions 

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the business tracks all costs related to producing the product or offering the service, 
including direct costs, indirect costs, and overheads, and uses them to determine the 
total cost of production. 
In product work services, actual costing works by tracking the actual costs 
incurred in producing a product or providing a service. These costs can be divided 
into direct costs and indirect costs. Direct costs 
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can be traced back to specific 
products or services, while indirect costs are not directly associated with a particular 
product or service. Instead, indirect costs are allocated across various products or 
services based on pre-determined formulas. For example, in a manufacturing firm 
that produces bicycles, the direct costs might include the cost of raw materials, labor, 
and other costs directly associated with producing the bikes. Indirect costs might 
include rent, utilities, and administrative expenses that can't be directly linked to the 
production of the bikes. In actual costing, these direct and indirect costs are tracked, 
and the actual cost of the bikes produced is calculated. 
Actual costing provides a realistic view of the costs involved in producing a 
product and helps businesses to calculate the actual profitability of each product or 
service accurately. By comparing actual costs with pre-determined standards, 
businesses can identify variances, analyze the reasons behind cost variances, and 
take appropriate steps to control costs. In conclusion, actual costing is a valuable 
tool in product work services as it enables businesses to track and analyze actual 
production costs, measure product profitability, and make informed business 
decisions. 
Actual costing and standard costing are two different methods used in cost 
management in business. While actual costing calculates the actual costs incurred in 
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https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/direct-
costs#:~:text=Direct%20costs%20are%20the%20expenses,considered%20to%20be%20indirect%20costs.) 

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producing a product or providing a service, standard costing estimates the costs 
involved in producing a product or service. 
The relationship between actual costing and standard costing is that actual 
costs are compared with the standard costs to identify variances. These variances 
provide insights into business operations and help managers to develop plans and 
strategies to improve efficiency and profitability. For example, a manufacturing firm 
may have estimated that the standard cost of producing one unit of a product is $50. 
However, when the product is manufactured, the actual cost incurred may be $45. 
In this case, there is a favorable variance of $5. This favorable variance could be due 
to various reasons like efficient labor, lower raw material costs, or better utilization 
of machinery. Alternatively, if the actual cost incurred is $55, there is an unfavorable 
variance of $5, and it could indicate inefficiencies or wastage in the production 
process. 
By analyzing these variances, managers can identify the causes of deviations 
from standard costs, make informed business decisions, and take corrective 
measures to improve efficiency and manage costs. The comparison also provides 
another opportunity to refine the company's standard costs and ensure they reflect 
the current costs. Overall, the relationship between actual costing and standard 
costing is that they both work together to provide businesses with insights into the 
actual costs associated with producing a product or providing a service. This 
information helps businesses to make informed decisions that enhance profitability 
and optimize business operations. 
Actual costing is a method of inventory valuation that records all direct and 
indirect manufacturing costs, including direct materials, direct labor, and overhead 

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costs, as they are incurred. The advantages and disadvantages of actual costing are 
as follows: 
Advantages of actual costing: 
-Accuracy
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: Actual costing provides a more accurate picture of the cost of 
production since it includes all costs incurred in the manufacturing process. 
-Control: Actual costing enables managers to have greater control over the 
production process since they have a more detailed understanding of the costs 
involved. 
-Decision-making: Actual costing helps managers make better decisions with 
respect to pricing, production, and inventory levels since they are better informed 
about the actual costs involved. 
-Transparency: Actual costing provides greater transparency into the true cost of 
production, which can build trust with investors, suppliers, and customers. 
Disadvantages of actual costing: 
-Time-consuming: Actual costing can be time-consuming and requires regular 
tracking of expenses and updates to the inventory records. 
-Complexity: Actual costing can be complex and difficult to understand, especially 
for small businesses with limited resources. 
-Fluctuating costs: Actual costing can be affected by fluctuating costs of raw 
materials and other inputs, making it more challenging to predict profitability or cash 
flow. 
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https://www.accuracy.com/ 

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-Susceptibility to errors: Actual costing is susceptible to errors due to the high 
volume of data involved, which can lead to misreported financial statements. 
Overall, actual costing is a useful tool for businesses that require a high degree 
of accuracy and control over their manufacturing costs. However, it also requires a 
significant investment in time and resources to implement and maintain, which may 
not be practical for all businesses. 
Advantages of Actual Costing: 
-Accurate Cost Calculation: Actual costing provides the most accurate calculation 
of cost as it involves the precise accounting of all the costs incurred in the production 
process. This method is helpful in calculating the actual cost of each product, which 
can be used in revenue recognition, pricing decisions, and profitability analysis, 
among others. 
-Better Control: Actual costing allows a better understanding of the cost structure of 
the business. This helps in identifying areas of wastage, inefficiency, or 
overproduction, which can be controlled to reduce costs and increase profitability. 
-Real-time Information
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: The actual costing system operates in real-time, and it 
provides the business with the latest information on the costs incurred. Managers 
can use this information to make informed decisions and react promptly to cost 
changes. 
-Transparency: Actual costing provides complete transparency into the cost of 
production and the factors that drive it. This helps in building trust between the 
management, employees, and shareholders, and this, in turn, encourages more 
efficient use of resources. 
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https://www.pcmag.com/encyclopedia/term/real-time-information-system 

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Disadvantages of Actual Costing: 
Costly: Actual costing is a time-consuming and costly accounting process as 
it involves recording every cost of goods sold. Consequently, businesses that are not 
well equipped with the necessary systems and have limited resources may find it 
challenging to implement. 
Delayed Information: Actual costing requires a lot of time to gather data on 
the costs incurred in the production process, which may cause a delay in the 
provision of information. This delay may hinder managers' ability to make timely 
decisions that would improve profitability and production efficiency. 
Complexity
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: Actual costing involves accounting for multiple variables that 
affect the cost of production, such as indirect costs, direct costs, overheads, and 
others. Managers may find it difficult to understand and interpret financial 
information generated from actual costing. 
Inaccurate Allocation: Actual costing may result in an inaccurate allocation 
of overhead costs, which may lead to misinterpretation of profitability. For example, 
a significant portion of the business overhead costs may be allocated to one product 
rather than being spread throughout the production process, leading to an incorrect 
interpretation of the product’s profitability. In conclusion, while actual costing has 
its advantages as an accurate costing method, it also comes with its disadvantages. 
Businesses must weigh the benefits and downsides, as well as their specific needs, 
before choosing to implement actual costing. 
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https://www.hltv.org/team/5005/complexity 

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