In order to control costs incurred for labour, materials and overheads a firm should have some basis for comparing the actual costs with some established yardstick. With a basis of comparison established, the expected level of expenditure can be determined in advance of a production period. Without any frame of reference it would be difficult to ascertain whether or not expenditure was too high, lower than expected or just about at the right level. Standard costing is the technique used by firms in order to facilitate the comparison of actual expenditure with standard costs.
In order to compare the efficiency of a firm in controlling its own level of expenditure we use the technique known as