Distinguish between Statement Cost and Estimated Cost.

Standard Cost vs. Estimated Cost: A Comparison

1. Definition:

• Standard Cost: Standard cost is a predetermined cost that is established based on the analysis of historical cost data, industry benchmarks, and expected future costs. It represents the expected cost of producing a product or providing a service under normal operating conditions.

• Estimated Cost: Estimated cost is a projected cost that is based on current information and assumptions about future costs. It is used to estimate the cost of a project, product, or service before it is completed or produced.

2. Basis of Calculation:

• Standard Cost: Standard cost is calculated based on a detailed analysis of cost elements, such as labor, materials, and overhead. It is often calculated using historical cost data and industry standards.

• Estimated Cost: Estimated cost is calculated based on current market conditions, prices, and other relevant factors. It may be based on expert judgment, cost models, or other estimation techniques.

3. Purpose:

• Standard Cost: Standard cost is used as a benchmark for evaluating actual costs and performance. It helps in cost control, performance measurement, and decision-making.

• Estimated Cost: Estimated cost is used to plan and budget for future projects or operations. It helps in determining the feasibility of a project and estimating its potential costs.

4. Flexibility:

• Standard Cost: Standard cost is generally more rigid and does not change frequently. It is based on predetermined standards and is used for comparison with actual costs.

• Estimated Cost: Estimated cost is more flexible and can be adjusted as new information becomes available. It is based on current estimates and assumptions and may change as conditions change.

5. Use in Decision Making:

• Standard Cost: Standard cost is used to evaluate performance and make decisions about cost control and improvement. It helps in identifying variances and taking corrective actions.

• Estimated Cost: Estimated cost is used in planning and decision-making. It helps in determining the feasibility of a project, setting budgets, and estimating future costs.

Conclusion:

In summary, standard cost is a predetermined cost based on historical data and industry standards, used for cost control and performance evaluation. Estimated cost, on the other hand, is a projected cost based on current information and assumptions, used for planning and decision-making. Both types of costs are important in financial management and play a role in different stages of the business process.