Standard Costs Flashcards
are used as a basis for comparison to measure performance or achievement
Standard
What is the nature of Standard Costs?
They serve as a measure of acceptable performance established by management as a guide in making economic decisions.
are carefully [or scientifically] pre-determined costs established by management to be as a basis for comparison with actual costs.
Standard Costs
Standards are normally set for the three costs elements of production namely:
Materials
Labor
Manufacturing Overhead
the carefully or scientifically pre-determined cost of manufacturing a unit of product during a specific future period of time
Standard Costs
is set to include all the costs to manufacture and sell a product, plus a desired amount of mark-up or profit.
Selling price
is one of the planning tools used by management. It’s end product is composed of budgeted or projected financial statements, including forecast schedules.
Budgeting
means that managers establish specific goals or objectives for all business activities. Eventually, actual results of operations are compared with these objectives.
Management by Objective (MBO)
states that managers will maximize their efficiency if they concentrate only on those operational factors showing material deviations from the plan
Management by Exception
This is the very essence of the word “standard”. Applied to standard Costs, it is the acceptable amount of cost that ought to be incurred in producing a product or undertaking an activity.
“a measure of acceptable performance”
In a business organization, the management is the authority. The standard must be established by the authority so that it may be acceptable to everybody.
“established by management”
Actual costs are compared with the standards. When significant deviations are noted, management takes the necessary course of action which will be for the benefit of a company as a whole.
“used as a guide in making economic decisions”
The basic cost factors, and the specifications of the product to be manufactured should be taken into consideration in the _________.
Development of Standards
is computed by multiplying the Physical Factor and Monetary Factor
Cost
Cost = Physical Factor x Monetary Factor
the unit of measurement of the cost elements involved in the production process
Physical Factor
the amount paid for the physical factors
Monetary Factor
necessary for the determination of the physical and monetary factors needed in the computation of manufacturing cost elements such as materials, labor and factory overhead
Specifications of the product to be manufactured
A list of materials required for the product
Physical Factor
can be established by determining the prevailing market prices
Standard Monetary Factor/Standard Price
usually measured in terms of time or labor hours.
Physical Factor for direct labor
The Standard Costs of Materials Formula:
Cost = Physical Factor x Monetary Factor
Standard Cost = Std. Physical Factor x Std. Monetary Factor
Standard Cost = Std. Quantity x Std. Price
Standard Labor Cost Formula
Std. Labor Cost= Std. Physical Factor x Standard Monetary Factor
Standard Cost = Std. Time x Std. Rate
Factory Overhead Standard Cost Formula
Standard Cost = Std. Time x Standard Rate
Three general types of standard
Basic Standard
Ideal Standard
Currently Attainable Standard
serves as a basis for comparing performance both expected and actual, over a long period of time.
a.k.a long range standard bec. once established it is used for several years
Basic Standard
this type of standard is established because trends are easier to study and analyze if the standard remains relatively constant.
Due to fluctuations in prices of materials and other manufacturing costs, it is NOT PRACTICAL to adapt for most companies
Basic Standard
is a measure of optimum performance. This standard is established on a perfect working condition - no delays, breakdowns, wastages, materials and manpower shortages, work stoppage, in other words, NO ERROR of any sort
Ideal Standard/Theoretical Standard
This standard is rather difficult or impossible to attain, if ever it does exist.
Workers are not expected to achieve it, but should be as close to it as possible.
Usually established as a starting point and a basis for computing other types of standards.
Ideal Standard
most commonly used type of standard.
It is established for a NORMAL LEVEL of operation and efficiency, allowing for expected or normal production problems (employee errors, wastage, delays, breakdowns, brownouts, & occasional inventory shortages).
It is not as strict as the Ideal Standard, but still it represents challenging, desirable, yet attainable performance.
Currently Attainable Standard
Who sets the standard?
Standard should be established by the authority or management so that the same may be acceptable.
Not only the CEO or top man is solely responsible to set the standards.
Establishing of standards involves other people who have something to do with the factors being considered (ENGINEERING, ACCOUNTING, PURCHASING Dept.)
Big companies have standard committee, who submit their recommendations to top management so that the standard may be given required approval…
Three activities involved in a standard cost accounting system:
Development of standards
Accumulation of actual costs
Computation and analysis of variance
A business can derive some benefits from standard costs in what areas?
Cost Control
Pricing Decisions
Motivation and Performance Appraisal
Cost Awareness and cost reduction
Preparation of budgets
Costing of inventories
Preparation of cost reports
Management by objective
