Chapter 4: Preparing budgets (Standing costing) Flashcards
What is a Standard cost?
Estimate of the costs that an organisation is likely to incur
‘standard’ can be thought as of a ‘target’ - something we want to achieve
Ideal Standard
Assumes perfect operating conditions with no allowance for waste, inefficiency or idle time
impossible target to achieve and therefore can be demotivating for staff
Attainable standard
Target assumes a realistic but challenging level of wastage and inefficiency in the production process
more realistic than standard cost
This should give staff an incentive to work hard to meet the target
Basic Standard
assumes nothing has changed since the standard was first set which could be a long time ago
tend to become out of date so they don’t act as a very meaningful standard for current production levels
Current standard
current levels of efficiency and assumes current cost levels will be maintained
provides no real incentive to improve
Uses of standard costs
Planning (at the start of the period) -
Control (at the end of the period)
The standard cost card
detailed breakdown of all costs associated with producing a unit of production of a particular product
Standard cost per unit
either absorption costing or marginal costing
Example template of standard cost card
Direct Materials
Direct Labour
Toal Direct (or Prime) cost
Indirect costs
Variable (marginal) production cost
Fixed production overhead
Full (absorption) production cost
Producing accurate estimates for the standard cost card
Standard Quantities
Standard Prices
Standard Quantities
-help identify the standard quantities of the resources needed, management can:
Use past experience of production requirements
Look at detailed product specifications if design of the product is known
Discuss with an expert in each relevant department
Standard Prices
Using information such as:
Current material supplier prices
Expected future price changes due to inflation
Availability of bulk discounts
Prices of other suppliers
Advantages of standard costing
Standard cost of making a single unit is a useful starting point for building overall budgets - makes the budgeting quicker and more accurate
Useful for Setting selling prices
Can be used to set targets for individual staff which help motivate them
makes measurement of performance easier by allowing us to perform detailed variance analysis
Valuing inventory at standard cost will be much simpler than trying to keep track of the individual actual purchase cost of thousand of units
Disadvantages of standard costing
Meaningful standards will be time-consuming to create and to keep up-to-date - a full standard cost per unit will require analysis of all aspects of the production process: Material costs, labour costs and overhead elements
Regularly changing production conditions (perhaps due to inflation or technological change) means that the standard costs will need to be regularly updated
Wrong type of standard can become very demotivating for staff
Difficult to establish an accurate standard if the business does not have comprehensive cost information
Standard costing to assist with budgetary control
3 areas
Benchmark for costs
Improve cost control
Facilitate performance measurement
