24. Building Budget Standards

Question 1

What is a standard cost sheet?

Answer 1

A standard cost sheet is, essentially, a “recipe card” that specifies standard prices and standard quantities to build a single product or service

Question 2

What is the difference between ideal cost standards and attainable cost standards?

Answer 2

Ideal cost standards represent the expected cost per input and input quantity based on an assumption that prices paid are at the absolute lowest possible level, and assuming that the use of inputs is absolutely efficient without any waste or error. Ideal standards are generally created in an authoritative (top-down) budgeting approach.

Attainable cost standards are based on more reasonable expectations about average prices and usage. These standards are generally created in a participative (bottom-up) budgeting approach.

Question 3

When setting cost standards, what impact does an authoritative (top-down) budget process have compared to a participative (bottom-up) budget process?

Answer 3

Authoritative cost standards are not likely to be biased by lower-level managers who will subsequently be evaluated based on the standards. On the other hand, participative cost standards will incorporate more of the lower-level managers’ knowledge and experience, which should reduce error in the forecast of cost standards.

Question 4

How are the standard quantity and standard price for a direct material cost calculated?

Answer 4

Computing the standard quantity of direct material for one unit of finished output involves identifying the standard content of material in the finished unit, then adjusting for normal expectations regarding scrap or quality rejects. The standard price for direct material needs to include all expected costs of receiving the raw material and preparing it for production.

Question 5

How are the standard quantity and standard price for direct labor cost calculated?

Answer 5

The standard quantity and standard price of direct labor costs are determined by accommodating for normal expectations of scrap and rejected output. The standard price for direct labor needs to consider all of the compensation costs, not just the wages paid directly to employees.

Question 6

What are two ways to reduce budgetary slack?

Answer 6

1. Limiting performance evaluation to controllable costs
2. Periodically reviewing and adjusting the budget when outside factors cause the original cost standards to become less representative or even irrelevant