CPIM Practice Exam

What do standard costs represent?

1. Actual historical costs of operations

2. Target costs of an operation or product

3. Variable costs associated with production

4. Estimated costs of raw materials only

The correct answer is: Target costs of an operation or product

Standard costs are used as a benchmark for what costs should be under normal operating conditions. They are pre-determined costs based on historical data and projections, serving as targets for budgeting and performance evaluation. By establishing standard costs, organizations can assess their efficiency in operations, identify variances between standard and actual costs, and implement improvements more effectively. These costs typically encompass the direct materials, direct labor, and overhead associated with the production of goods. Therefore, they not only indicate a target cost but also facilitate the performance measurement process. The other options, while related to costs in a broader sense, do not capture the essence of what standard costs represent. Actual historical costs reflect past performance rather than set future targets, variable costs focus only on specific cost elements of production, and estimated costs of raw materials do not account for the entirety of production expenses. Thus, the representation of standard costs as target costs aligns perfectly with their purpose in cost management and performance evaluation.