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A costing technique which uses predetermined standards. A product is costed on the basis of a budgeted output. Where the output has been fixed, the amount of material then needed is known, as is the amount of labour. The amount of overheads is taken as a constant. Each – product then has a fixed material cost, a fixed direct labour cost and an overhead charge, probably stated as a fixed percentage of direct expenses. There is therefore a standard profit for the period. Actual cost will not t correspond to budgeted cost, but the differences are handled through accounts known as variance accounts and the amount charged to any particular job or product is not altered until the standards are altered.
Reference: The Penguin Business Dictionary , 3rd edt.
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