Question 3 (b)

Estimated cost and standard cost distinguished

6 marks

Time to write: About 12 minutes
Topic: Standard costing

Question

Question 3 (b) · 6 marks

Distinguish 'Estimated Cost' from 'Standard Cost'.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

DistinguishSet the differences out in a table, basis by basis, not as two separate essays.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Estimated cost explained 2 marks 3 min
2 Standard cost explained 2 marks 3 min
3 Differences 2 marks 3 min
Check: every ask answered, key terms underlined 2 min

123

Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Estimated cost

An estimated cost is a reasonable forecast of what a cost is likely to be, made before production on the basis of past experience, adjusted for expected changes in prices and conditions. Estimates are used mainly for quoting prices, preparing tenders and making rough plans. They indicate what a cost will be.

Example: a contractor estimates the cost of building a warehouse from the costs of similar past jobs plus expected price rises, and quotes a price on that basis.

Standard cost

A standard cost is a predetermined cost, scientifically set by technical and cost studies, of what a unit of product or service should cost under efficient operating conditions. Standards are set for material quantity and price, labour time and rate, and overheads, and are used to control costs by comparing actual costs with them and analysing variances.

Example: a standard of 2 kg of material at ₹50 per kg and 1.5 labour hours at ₹200 per hour is set for one unit; actual usage of 2.2 kg shows an adverse usage variance.

Both are predetermined costs, which is why they are often confused; the difference lies in how they are set and what they are used for.

Differences

Basis	Estimated cost	Standard cost
Meaning	What a cost will probably be	What a cost should be under efficient conditions
Basis	Past experience and judgment	Scientific study (time and motion, engineering, market studies)
Accuracy	Less accurate, approximate	More precise
Purpose	Price quotation, tenders, rough planning	Cost control, performance measurement, budgeting
Emphasis	Realistic expectation	Target of efficiency
Use in the accounts	Generally not entered in the accounts	Can be built into the accounting system (standard costing)
Variances	Not usually analysed	Variances analysed by cause and responsibility
Scope	Can be used for a single job or contract	Used for repetitive, standardised production

Where the 6 marks sit

#	Component	Marks
1	Estimated cost explained	2
2	Standard cost explained	2
3	Differences	2
	Total	6

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