What is a standard cost system and how does it differ from actual costs?

• A. Standard costs are fixed for life of product.
• B. Standard costs are predefined costs for inputs; variances compare standard to actual to evaluate efficiency and forecasting.
• C. Standard costs are the actual costs incurred; variances compare actual to standard.
• D. Standard costs are fixed for all products across the entire organization.

Answer: (B)

In a standard cost system, costs for inputs like materials, labor, and overhead are set in advance as standard costs. These standards act as benchmarks for what the costs should be if operations run efficiently. Actual costs are what actually occur, and management compares the two to compute variances. These variances reveal how well the organization controlled price and usage, and they help assess efficiency and forecasting accuracy.

This description matches the idea that standard costs are predefined costs for inputs and that variances compare standard to actual to evaluate efficiency and forecasting. Standard costs are not fixed for life of the product, nor are they the actual incurred costs, and they aren’t the same across all products—standards are usually specific to a product or process and can be updated as conditions change.