Standard Cost and Estimated Cost | Cost Accountancy

Learn about the comparison between Standard Cost and Estimated Costs.

Difference between Standard Cost and Estimated Cost

(i) Objective:

Estimated costs are intended to ascertain what the costs will be while standard costs aim at what costs should be.

(ii) Calculation:

Estimated costs are calculated on the basis of past performance being adjusted in the light of anticipated changes in the future. Standard costs, on the other hand, are ascertained on a scientific basis keeping in view certain conditions of efficiency.

(iii) Aid to Management:

Estimated costs are not helpful to management in accomplishing management functions as they are not scientifically predetermined costs. But standard costs involves operational analysis and evaluation and a comprehensive review of internal and external factors. They become reliable yardsticks for product costing, product pricing, planning, co-ordination and price control purposes.

(iv) Emphasis:

Estimated costs put emphasis on cost with which it is compared at the end of the accounting period. If the estimated costs are found higher or lower than actual costs, they are revised for the use in the next accounting year. In standard costing the emphasis is put on standard costs, i.e., what costs of material labour and overhead should be incurred if the factory is to be operated as a highly efficient unit.

Under standard costing, actual costs are ascertained only to facilitate their comparison with standard costs.

(v) Use:

The estimated costs are used only as a statistical data, whereas standard costs are used as a regular system from which variances are ascertained and the reasons for such variances are analysed and corrected measures are taken promptly.

(vi) Revision:

Estimated cost is adjusted to the actual cost and expected changes in the coming period. While Standard Cost is not generally revised unless it has been set incorrectly or it has become irrelevant to the changed situations. Thus, Standard Cost is free from frequent changes or modifications.

(vii) Barometer of Efficiency:

Estimated Cost—being only an expression of likely cost in the future—cannot be used to measure the efficiency or otherwise. But standard cost is used as a barometer of efficiency since it is compared with actual cost.

Difference between Standard Cost and Estimated Cost

Both the Estimated Cost and the Standard Cost have at least one similarity. That is, both pertain to the future period.

However, a close look at these two terminologies reveals few important differences as identified below:

1. Standard Cost specifies clearly about what should be the cost of a product or service. On the other hand, Estimated Cost states about what will be the cost of a product or service,

2. Standard Cost specifies the permissible amount of expenditure to produce a unit, or a given number of units, of a product. On the other hand, Estimated Cost states the amount of cost that the company is likely to incur to produce a unit, or a given number of units, of a product,

3. Standard Cost is used as a criterion to evaluate the cost economies. Because, the very objective of setting up of standards is to ensure that the costs do not exceed certain limits. Actuals are compared with the standards and on the basis of the variances, necessary action is initiated.

On the other hand, control aspect is absent in Estimated Cost. Because, no further action is initiated in the case of Estimated Costing. And in most of the cases, Estimated Costs are used for preparing and submitting tenders and for price fixation, and

4. Standard Costs are usually determined on the basis of scientific and technical analysis. However, the Estimated Costs are determined only on the basis of the past cost data and the anticipated changes in future.

This way, Estimated Cost differs from the Standard Cost and the differences between these two stem mainly from the manner in which the costs are pre-determined.

Difference between Standard Cost and Estimated Cost  

The main differences between standard cost and estimated cost are:

Difference # Standard Cost:

1. It is scientifically used, and it is a reg­ular system of account based upon esti­mation and time studies. Its object is to ascertain “what the costs should be”.

2. It is used for effective cost control and to take proper action to maximise efficiency.

3. It is a continuous process of costing, and takes into account all the manufacturing processes.

4. It can be used where standard costing is in operation.

5. As it is based on scientific analysis, it is more accurate than the estimated cost.

Difference # Estimated Cost:

1. It is used as statistical data, and leads to a lot of guess work.

2. Its object is to ascertain “What the costs will be”.

3. It gives importance to cost ascertain­ment for fixing sale price.

4. It is used for a specific use; i.e., fixing sale price.

5. It can be used where costing is in operation.

6. It is not accurate. It is an approxima­tion based on past experience.

Difference between Standard Cost and Estimated Cost

Although both estimated costs and standard costs are computed in advance of production, and are, therefore, predetermined costs, estimated costs differ from standard costs in the following respects –

(i) Difference in Computation:

Estimated costs are predetermined costs based on past performance and adjusted for anticipated future changes. They are thus established in advance as the best estimates subject to the assumption that costs are free to move as they like.

Standard costs, on the other hand, represent a carefully formulated advance estimate of what future costs should be under conditions expected to prevail. They are based on technical and engineering estimates. As such, they are planned costs expected to be achieved in a particular production process under normal conditions.

(ii) Difference in Accuracy:

Being based on average of past costs adjusted for anticipated changes in future, estimated costs are less likely to be precise. However, standard costs are fixed only after scientific analysis of relevant factors having a bearing upon costs.

As such, standard costs tend to be more precise and accurate than estimated costs.

(iii) Difference in Emphasis:

Historical costs emphasise what the ‘costs are’ while estimated costs emphasise what the ‘cost will be’. Standard costs, on the other hand, emphasise what the ‘costs should be’.

(iv) Difference in Use:

In an estimated costing system, the emphasis is on cost ascertainment for fixing selling prices. As such, estimated costs are not of much practical significance from the point of view of cost control.

Standard costing, on the other hand, being precise in nature, provides a scientific basis with which actual costs are compared. Accordingly, standard costs serve as an effective tool of cost control.

(v) Difference in Records:

Estimated costs are statistical in nature. As such, they are not a part of the accounting system. They are only posted in the cost sheet for the purpose of comparison. They are used as statistical data for future costs.

But, standard costs are a part of the accounting system. They have a place in the accounting records and are used for ascertaining variances from the actual costs.

(vi) Difference in Determination:

While standard costs are determined for each element of cost on a unit basis, estimated costs are determined for a particular period for purposes of price fixation.

(vii) Difference in Applicability:

Estimated costs are generally applicable to concerns engaged in construction work such as buildings, factories, bridges, ships and other types of concerns such as bakeries, bottling companies, medicines and dairy products.

Although the principles underlying standard costing can be applied to any industry, standard costs are most suitable to industries engaged in mass production.

Difference between Standard Cost and Estimated Cost

Estimated costs are products of past experience or personal opinion. They are approximations aimed at revealing what the costs will be in future. They are used as statistical data and involve a lot of guesswork. They are less accurate when compared to standard cost, which depends on a scientific analysis of all relevant factors.

The objective of estimated costing is to anticipate correctly the future costs whereas the object of standard costs is to ensure cost control. Standard costs are moral specific and reveal what the costs should be.

Standard Cost:

1. Represents – What the costs should be

2. Involves – Scientific analysis of all relevant factors

3. Focus – Cost control

4. Accuracy – More accurate

Estimated Cost:

1. Represents – What the cost will be

2. Involves – Guess work. Based on past experience and future anticipation

3. Focus – Cost ascertainment

4. Accuracy – Less accurate

Difference between Standard Cost and Estimated Cost

Both standard costs and estimated costs are predetermined costs computed in advance of production. But their objectives are normally different.

The differences between the two are summarised as under:

Difference # Standard Cost:

1. Standard cost aims at what the cost ‘SHOULD’ be.

2. Standard costs are planned costs which are determined on a scientific basis after taking into account certain level of efficiency.

3. In standard costing system, standard costs are usually incorporated into the accounts, from which variances of ac­tual from standard are ascertained.

4. Standard costs are meant to be used for a concern operating on a standard costing system.

5. Standard costs mainly serve the purpose of cost control.

Difference # Estimated Cost:

1. Estimated cost is an assessment of what the cost ‘WILL’ be.

2. Estimated costs are based on average of the past figures, taking into consideration an­ticipated changes in the future.

3. Estimated costs are used as statistical data for comparison with actual figures. Such costs are not entered in the books of ac­counts

4. Estimated costs may be used in any concern operating on a historical cost system.

5. Estimated costs do not serve the purpose of cost control. Such costs serve other pur­poses, like quoting the selling price of new products, decision to buy or manufacture, etc.

Difference between Standard Cost and Estimated Cost

Difference # Standard Cost:

1. It is a predetermined cost which is determined on a scientific basis, after considering all factors of costs, e.g., raw material consumption rate, machine efficiency, labour efficiency, etc.

2. It is a specification of what a cost ought to be when it is incurred.

3. It is used in a concern where standard costing system is in operation.

4. It is used for analysis of variances and cost control purpose.

5. It is usually incorporated into the accounts.

Difference # Estimated Cost:

1. It is a predetermined cost which is determined on the basis of past performance, after considering anticipated changes in future.

2. It is an assessment of what a cost will be when it is incurred.

3. It can be used in any concern using historical cost system.

4. It is used in decision making, e.g., buy or manufacture, quoting selling price of new product, tendering, etc.

5. It is used as statistical data for comparing with actual figures and not entered in the books of accounts.

Difference between Standard Cost and Estimated Cost

Both, standard cost and estimated cost are predetermined costs and are considered to carry the same meaning. But it is not so. The objectives of both these costs are different.

The main points of difference between standard cost and estimated cost are as follows:

1. Estimated cost is a reasonable assessment of what a cost ‘will be’, whereas standard cost is a specification of what a cost ‘should be’.

2. Estimated cost is ascertained on the basis of expected actuals. Standard cost is said to be a planned cost ascertained on scientific basis.

3. Estimated cost is an expression of likely cost in future and cannot be used to measure efficiency or otherwise. Standard cost is used as a barometer of efficiency. Standard cost is compared with actual cost with a view to ascertain operational efficiency.

4. The use of estimated cost is made in a business concern where historical costing is in operation whereas standard cost is used in a concern making the use of standard costing system.

5. Estimated cost does not serve any control purpose but standard cost serves as a tool of exercising control over costs.