Financial Terms
Standard costs

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Definition of Standard costs

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Standard costs

A budget cost for materials and labour used for decision-making, usually expressed as a per unit cost that is applied to standard quantities from a bill of materials and to standard times from a

Related Terms:

backflush costing

a streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires
few allocations, uses standard costs, and has minimal variances
from standard

Agency costs

The incremental costs of having an agent make decisions for a principal.

Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.

capitalization of costs

When a cost is recorded originally as an increase
to an asset account, it is said to be capitalized. This means that the outlay
is treated as a capital expenditure, which becomes part of the total
cost basis of the asset. The alternative is to record the cost as an expense
immediately in the period the cost is incurred. Capitalized costs refer
mainly to costs that are recorded in the long-term operating assets of a
business, such as buildings, machines, equipment, tools, and so on.

Carring costs

costs that increase with increases in the level of investment in current assets.

carrying costs

costs of maintaining current assets, including opportunity cost of capital.

Committee, AIMR Performance Presentation Standards Implementation Committee

The Association for Investment Management and Research (AIMR)'s Performance Presentation standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR Performance
Presentation standards (AIMR-PPS(TM)) for portfolio performance presentations.

Standard Costs Image 2

Contract Work Hours and Safety Standards Act

A federal Act requiring federal contractors to pay overtime for hours worked exceeding 40 per week.

Cost Accounting Standards Board (CASB)

a body established by Congress in 1970 to promulgate cost accounting
standards for defense contractors and federal agencies; disbanded
in 1980 and reestablished in 1988; it previously issued
pronouncements still carry the weight of law for those
organizations within its jurisdiction

Costs Capitalized in Stealth

A particularly egregious form of aggressive cost capitalization
where inappropriately capitalized costs are hidden within other unrelated account balances.

costs of financial distress

costs arising from bankruptcy or distorted business decisions before bankruptcy.

Direct costs

costs that are readily traceable to particular products or services.

ethical standard

a standard representing beliefs about moral
and immoral behaviors

Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing

expected standard

standard set at a level that reflects what
is actually expected to occur in the future period; it anticipates
future waste and inefficiencies and allows for them;
is of limited value for control and performance evaluation purposes

Fair Labor Standards Act of 1938

A federal Act creating standards of overtime
pay, minimum wages, and payroll recordkeeping.

Standard Costs Image 3

Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).

Fixed costs

costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.

fixed costs

costs that do not depend on the level of output.

fixed expenses (costs)

Expenses or costs that remain the same in amount,
or fixed, over the short run and do not vary with changes in sales volume
or sales revenue or other measures of business activity. Over the
longer run, however, these costs increase or decrease as the business
grows or declines. Fixed operating costs provide capacity to carry on
operations and make sales. Fixed manufacturing overhead costs provide
production capacity. Fixed expenses are a key pivot point for the analysis
of profit behavior, especially for determining the breakeven point and for
analyzing strategies to improve profit performance.

Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.

Funding Costs

The price of obtaining capital, either borrowed or equity, with intent to carry on business operations.

Gold exchange standard

A system of fixing exchange rates adopted in the Bretton Woods agreement. It
involved the U.S. pegging the dollar to gold and other countries pegging their currencies to the dollar.

Gold standard

An international monetary system in which currencies are defined in terms of their gold
content and payment imbalances between countries are settled in gold. It was in effect from about 1870-1914.

Gold Standard

A fixed exchange rate system in which a currency is directly convertible into gold.

ideal standard

a standard that provides for no inefficiencies
of any type; impossible to attain on a continuous basis

Incremental costs and benefits

costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.

Indirect costs

costs that are necessary to produce a product/service but are not readily traceable to particular products or services – see overhead.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.

Market timing costs

costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.

Menu Costs

The costs to firms of changing their prices.

Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.

overhead costs

Overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.

Part standardization

The planned reduction of similar parts through the standardization
of parts among multiple products.

perfection standard

see ideal standard

Period costs

The costs that relate to a period of time.

Policy Acquisition Costs

costs incurred by insurance companies in signing new policies, including expenditures on commissions and other selling expenses, promotion expenses, premium
taxes, and certain underwriting expenses. Refer also to customer, member, or subscriber
acquisition costs.

Political Costs

The costs of additional regulation, including higher taxes, borne by large and
high-profile firms.

practical standard

a standard that can be reached or slightly
exceeded with reasonable effort by workers; it allows for
normal, unavoidable time problems or delays and for
worker breaks; it is often believed to be most effective in
inducing the best performance from workers, since such
a standard represents an attainable challenge

Preopening Costs

A form of start-up cost incurred in preparing for the opening of a new store or facility.

Price impact costs

Related: market impact costs

Round-trip transactions costs

costs of completing a transaction, including commissions, market impact
costs, and taxes.

Search costs

costs associated with locating a counterparty to a trade, including explicit costs (such as
advertising) and implicit costs (such as the value of time). Related:information costs.

Semi-fixed costs

costs that are constant within a defined level of activity but that can increase or decrease when
activity reaches upper and lower levels.

Semi-variable costs

costs that have both fixed and variable components.

shortage costs

costs incurred from shortages in current assets.


a model or budget against which actual results are
compared and evaluated; a benchmark or norm used for
planning and control purposes

Standard containers

Common-sized containers that are used to efficiently move,
store, and count inventory.

standard cost

a budgeted or estimated cost to manufacture
a single unit of product or perform a single service

Standard cost

A predetermined cost that is based on original engineering designs and
production methodologies. It is frequently used to determine the degree of additional
actual costs incurred above the standard rates.

standard cost card

a document that summarizes the direct
material, direct labor, and overhead standard quantities and
prices needed to complete one unit of product

standard cost system

a valuation method that uses predetermined
norms for direct material, direct labor, and overhead
to assign costs to the various inventory accounts and
Cost of Goods Sold

Standard deviation

The square root of the variance. A measure of dispersion of a set of data from their mean.

Standard Deviation

A statistical term that measures the dispersion of a variable
around its expected value. The standard deviation is often used as
a measure of risk when applied to a return on an investment.

standard deviation

the measure of variability of data around
the average (or mean) value of the data

Standard deviation

A measure of the variation in a distribution, equal to the
square root of the arithmetic mean of the squares of the deviations from the
arithmetic mean; the square root of the variance.

standard deviation

Square root of variance. Another measure of volatility.

Standard error

In statistics, a measure of the possible error in an estimate.

standard error of the estimate

a measure of dispersion that reflects the average difference between actual observations and expected results provided by a regression line

standard overhead application rate

a predetermined overhead rate used in a standard cost system; it can be a separate variable or fixed rate or a combined overhead rate

Standard & Poor’s Composite Index

Index of the investment performance of a portfolio of 500 large stocks. Also called the
S&P 500.

standard quantity allowed

the quantity of input (in hours or some other cost driver measurement) required at standard for the output actually achieved for the period

Standardized normal distribution

A normal distribution with a mean of 0 and a standard deviation of 1.

Standardized value

Also called the normal deviate, the distance of one data point from the mean, divided by
the standard deviation of the distribution.

Start-up Costs

costs related to such onetime activities as opening a new facility, introducing
a new product or service, commencing activities in a new territory, pursuing a new class of customer,
or initiating a new process in an existing or new facility.

Statement of Financial Accounting Standards No. 52

This is the currency translation standard currently
used by U.S. firms. It mandates the use of the current rate method. See: Statement of Financial Accounting
standards No. 8.

Statement of Financial Accounting Standards No. 8

This is a currency translation standard previously in
use by U.S. accounting firms. See: Statement of Accounting standards No. 52.

Sunk costs

costs that have been incurred and cannot be reversed.

Sunk costs

costs that have been incurred in the past.

sunk costs

costs that have been incurred and cannot be recovered.

Trading costs

costs of buying and selling marketable securities and borrowing. Trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.

Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information
costs, search costs.

Undepreciated Capital Costs

The tax definition of the value of an asset that is eligible for tax deprecation.

variable costs

costs that change as the level of output changes.

accrual-basis accounting

Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. Recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has many assets other than cash, as well as
many liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
system—one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.

failure cost

a quality control cost associated with goods or
services that have been found not to conform or perform
to the required standards as well as all related costs (such
as that of the complaint department); it may be internal or

Flexible budget

A method of budgetary control that flexes, i.e. adjusts the original budget by applying standard
prices and costs per unit to the actual production volume.

variance analysis

the process of categorizing the nature (favorable or unfavorable) of the differences between standard and actual costs and determining the reasons for those differences







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