A standard cost is a predetermined calculation of what a cost should be under specified working conditions. Standards can be set for materials, labour and overheads. Setting a standard involves the establishment of two components for each cost type, the volume required and the unit cost attached to that volume.

A standard costing system provides more than a benchmark for measuring actual performance. A standard costing system enables more accurate pricing of products based on detailed cost analysis which in turn facilitates budgeting. Standard costing facilitates more detailed variance analysis leading to a deeper level of investigation and better management decision-making. In addition standard costing involves setting efficiency targets for employees stimulating cost consciousness. In addition, the setting of standards involves determining the best materials and practices, which may lead to economies. A standard costing system allows an overall improvement in the financial control of the business.