Standard costs Flashcards
Define Standard costs.
Standard costs are a set of benchmarks used to meausre the performance of the firm with respect to controlling costs and for internal repetitive contracting.
Name three areas in which standard costs can be used in the decision-making process.
Product pricing decisions.
Make-versus-buy decisions.
plant ressource allocation decisions.
Can standard costs be viewed as a proxy for opportunity costs?
Yes for example, the standard cost of an hour of machine time in the lathe department is a proxy for the opportunity cost of using one hour of lathe time. This standard cost conveys to other managers throughout the firm the oppotunity cost of using lathes.
How do standard costs illustrate the trade-off between decision making and control?
If managers with the specific knowledge for updatung the standard have part of their performance evaluation based on the difference between actual performance and the standard, this creates an incentive for them to update standards to levels that theu feel are achievable.
What is target costing? How does it differ from traditional standard costing?
Target costing is a top-Down approach. It Begins with a target Price established by marketing. The firm’s required return on Investment is subtracted from the target Price to derive the target product cost. this cost is then exploded into its subcomponents, which become the standards to be met if the firm is ti meets its desired market penetration and required return. traditional standard costing is a bottom-up approach and is less product/market driven
What are the three sets of standard cost varances produced by most firms?
Direct labor variances.
Direct material variances.
Overhead variances.
What are the two components of direct labor variances?
Wage variances.
Effeciency variances.
When might large favorable variances be viewed as bad?
Large favorable variances could be the result of replacing the standard-quality material with substandard-quality material, yielding a favorable Price variance.
What are the components of the direct materials variance?
Price variance.
Quantity variance.
What are some of the incentive effects when standard cost variances are used as part of the performance evaluation system?
Incentive to build inventories and/or lower quality. Externalities. Discourage cooperations Mutual monitoring incentives. Satisficing behavour.
Describe how Price variances create incentives to build inventories?
In seeking favorable Price variances, the purchasing department has incentives to buy materials in large lot sizes to secure quanity discounts.
Describe some externalities created by standard cost variances?
The purchasing department can impose costs on manufacturing by purchasing low-quality materials. Manufacturing can impose costs on the purchasing department by requesting rush deliveries or by changing the specifications of purchased parts.
Why are variances usually written off to cost of goods sold?
There are two organizational reasons for writing variances off to cost of goods sold.
- Prorating the variances creates incentives for managers to manipulate reported income.
- Prorating variances back to inventories will change the product costs incurred by the manager responsible for selling these inventories.
The first reaction will be to change prices, an action he or she should not take. Of course marginal costs can and do change, and standards must be updated to correctly reflect any changes.
What are some of the costs and benefits of standard cost systems?
Standard cost systems are expensive in terms of the opportunity cost of a manager’s time to investigate cost variances and oversee the Development of mantenance of standards. The benefit of standard costs comes from the Development of specialized knowledge created by the manager in his or her investigations.
Why are some firms dropping standard cost systems
Many cost systems were developed as a Means to measure and control direct labor costs. The fraction of direct labor in modern factories has drcreased, Thus lowering the benefits of standard cost systems. Also, modern factories have frequent in products and/or processes. Numerous changes the costs of maintaining a standard cost system to increase.
