Standard Cost

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  eBook - PDF

  Managerial Accounting

  • James Jiambalvo(Author)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  This cost is referred to as the Standard Cost. A primary benefit of a Standard Costing system is that it allows managers to compare differences between standard and actual costs. Such differ- ences are referred to as Standard Cost variances. For material costs, the Standard Cost variances distinguish between the variance due to a difference between the actual price and the standard price and the variance due to a difference between the actual quantity of raw material and the standard quantity. Standard Costing systems also generate variances for direct labor and manufacturing overhead. Large or unusual variances are investigated by manage- ment to determine whether production is inefficient. If problems exist, corrective action can be taken. Thus, Standard Costs play an important role in con- trolling operations as well as in determining product costs. This chapter illustrates both of these uses of Standard Costs. 415 ©ASA studio/Shutterstock LEARNING OBJECTIVES 1 Explain how Standard Costs are developed, and calculate and interpret variances for direct material and direct labor. 2 Calculate and interpret variances for manufacturing overhead, and calculate the financial impact of operating at more or less than planned capacity. 3 Discuss how the management-by-exception approach is applied to the investigation of stan- dard cost variances. Also, explain why a favorable variance may be unfavorable, how process improvements may lead to unfavorable variances, and why evaluation in terms of variances may lead to overproduction. 416 CHAPTER 11 Standard Costs and Variance Analysis Standard CostS The term Standard Cost refers to the cost that management believes should be incurred to produce a good or service under anticipated conditions. A tool manufacturing com- pany may set a Standard Cost for the production of a hammer, whereas a bank may set a Standard Cost for processing a check. In the following examples, we concentrate on Standard Costing in a manufacturing setting.

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  Principles of Cost Accounting

  • Edward Vanderbeck, Maria Mitchell(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 8.2 Standard Cost Procedures Standard Cost accounting is based on the following procedures: 1. Standard Costs are determined for the three elements of cost: direct mate-rials, direct labor, and factory overhead. 2. The Standard Costs, the actual costs, and the variances between the actual and Standard Costs are recorded in appropriate accounts. 3. Significant variances are analyzed and investigated, and then appropriate action is taken. 8.2a Determination of Standard Costs for Materials and Labor The first step, the determination of Standard Costs for a product, is a complex task that requires considerable experience and familiarity with manufacturing operations as well as the cooperation of the departmental employees. The accounting department is often consulted to provide historical costs, to iden-tify cost trends, and to assist in establishing the standards. A materials cost standard is based on estimates of the quantity of materials required for a unit of product and the unit cost to purchase the materials. In setting a materials cost standard, management may consult with the production engineering depart-ment to determine the amounts and types of materials needed, and with the purchasing agent regarding suppliers ’ prices. A labor cost standard is based on estimates of the labor hours required to produce a unit of product and the cost of labor per unit. In establishing a labor cost standard, the heads of various departments contribute their knowledge of the processing operations.

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  Cost Management

  • Don Hansen, Maryanne Mowen, Dan Heitger, , Don Hansen, Maryanne Mowen, Dan Heitger(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  For example, Standard Costing systems provide readily avail-able unit cost information that can be used for pricing decisions. This is particularly useful for companies that engage in extensive bidding and for companies that are paid on a cost-plus basis. Standard product costs are determined using quantity and price standards for direct materials, direct labor, and overhead. In contrast, a normal costing system predetermines overhead costs for the purpose of product costing but assigns direct materials and direct labor to products by 3 Norwood Whittle, “Older and Wiser,” Management Accounting ( July/August 2000): 34–36. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 444 Chapter 9 Standard Costing: A Functional-Based Control Approach using actual costs. An actual costing system assigns the actual costs of all three manufacturing inputs to products. Exhibit 9.1 summarizes these three cost assignment approaches. Standard Costing also simplifies product costing for firms in process industries. For exam-ple, if a process-costing system uses Standard Costing to assign product costs, there is no need to compute a unit cost for each equivalent unit-cost category. A standard unit cost would exist for direct materials, transferred-in materials, and conversion costs categories. 4 Usually, a standard process-costing system will follow the equivalent-unit calculation of the FIFO approach. That is, current equivalent units of work are calculated.

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  Introduction to Accounting

  • Pru Marriott, J R Edwards, Howard J Mellett(Authors)
  • 2002(Publication Date)
  • SAGE Publications Ltd

    (Publisher)

  A system of Standard Costing makes use of predetermined Standard Costs relating to each element of cost (labour, material and overhead) for each type of product manufactured or service supplied. The actual costs incurred are then compared with Standard Costs as work proceeds. The difference between actual and standard is termed the variance, and this is analysed to help identify the reason for it so that inefficiencies may immediately be brought to the attention of the responsible managers and corrective action taken.

  FIGURE 14.1Management planning, decision-making and control

  We can therefore see that there are broad similarities between Standard Costing and budgetary control; the essential difference is that we are concerned here with controlling costs at the level of the individual or product rather than at the level of the department.

  The first stage in the operation of a system of Standard Costing is to establish the standards. It may be necessary to employ work-study engineers to measure time taken on particular jobs and the materials used. It is possible to distinguish between ideal (or theoretical) standards that assume 100 per cent efficiency and expected (or attainable) standards given the conditions prevailing in a particular business organization. Ideal standards are almost certain not to be achievable and are likely to have a demotivating effect on personnel. For this reason, systems of Standard Costing are usually based on a reasonably ambitious but achievable level of efficiency. The advantages of a system of Standard Costing may be summarized as follows:

   

  • The installation of a system of Standard Costing requires the company to review existing practices and this often results in substantial improvements being made.
  • Standard Costs are a more meaningful yardstick than the alternatives, which are to compare results with those of a previous year or a different company. For example, this year’s results may be better than last year’s but last year’s results may have been abysmal, so the observed improvement, although welcome, does not indicate whether the firm has achieved its potential.

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  Cost & Management Accounting N6 SB

  TVET FIRST

  • T Lakhan(Author)
  • 2015(Publication Date)
  • Macmillan

    (Publisher)

  72 MODULE 3 Standard CostING UNIT 3.1: THE AIMS, USES AND ADVANTAGES OF Standard CostING Introduction Remember that, in Cost and Management Accounting N5, you were introduced to the four functions of management? Can you remember them? The four functions of management are: Planning Organising Leading Control. In the planning stage, management uses information to prepare estimates (budgets) regarding the business. OVERVIEW When you have completed this module, you should be able to: Describe the aims, uses and advantages of Standard Costing. Calculate the following materials variances and give possible reasons for such variances: – Materials price – Materials quantity – Total materials variance. Calculate the following labour variances and give possible reasons for such variances: – Labour rate – Labour efficiency – Total labour variance. Calculate the following manufacturing overhead variances and give possible reasons for such variances: – With regard to variable manufacturing overheads: P Rate variance P Efficiency variance. – With regard to fixed manufacturing overheads: P Expense variance P Volume variance P Total fixed manufacturing overheads. 73 Standard Costing estimates what the costs of a product or service will be in normal circumstances. Standard Costing is established in terms of a single unit rather than in total. A standard is a measure which is developed and concluded after some research. Businesses come to conclusions that, in certain circumstances, this is what costs, usage and volumes should be. At the end of a period, actual information will be available from the business’s records. You then take the actual information (look at what actually happened) and compare it with the standard information (what was supposed to happen). Ideally, they should be the same. If actual results are not the same as standard results, the difference is known as a variance .

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