2026 Accounting Complete Practice Test

Standard costs are predetermined costs per unit that reflect normal operating conditions. They’re set before production, based on expected input prices, normal efficiency, and typical capacity. This creates a benchmark for planning and cost control, so managers can see how actual costs stack up against what was expected. By comparing actual costs to these standards, variances are identified—showing whether costs were higher or lower than anticipated and helping managers investigate causes such as price changes, waste, or inefficiency. Because they’re established in advance, standard costs aren’t determined after production. They’re useful in both manufacturing and service contexts, and they inherently relate to variances, which is why the statement about them having no relation to variances is incorrect.