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Standard Costs (Flexible Budgeting):
- Standard Costs are
carefully predetermined costs that are usually expressed on a
per-unit basis; they are target costs, costs that should be
attained. Standard costs help to build budgets, gauge
performance, obtain product costs, and save bookkeeping
costs. Standard costs are the building blocks of a
flexible budgeting and feedback
system (the comparision of actual performance with
planned performance).
- As work is begin done, actual costs incurred are compared with
standards costs to reveal variances. This feedback helps
discover better ways of adhering to standards, of altering
standards, and of accomplishing objectives.
- The term standard cost usually
refers to a single finished unit of
output. In contrast, budgeted cost
usually refers to a total
amount. Think of a
standard as a budget for a single unit.
- A flexible budget (also called a
variable budget) is a budget that is adjusted for changes in
volume.
- Flexible-budget variance is the difference
between actual amounts and the flexible-budget amounts for the
actual output achieved.
- Ideal standards are those standards that can
only be attained under the best circumstances-that is, no problems
with marchiner or efficeincy.
- Practical standards can be met when average workers are
efficent at their work. Since practical standars make
allowances for repairs and rest periods, making them more
realistic than ideal standards, they are generally used in
budgeting.
- A Standard cost system highlights exceptions
(instances where things are not going as planned). The
identification of variances serves as an early waring system for
management. It points out potential problem areas for closer
analysis. In this way it assits management in controlling
produciton costs.
Some of The Variances:
- Price Variance is defined as the difference between actual unit prices and budgeted
unit prices multipled by the actual quantity of goods or services in question.
- Price Variances =
(Act Price - Std Price) x (Actual Qty of Units
Purchased)
- You have Price Variances both for Material Purchased
and Direct Labor Cost
- Efficiency Usage Varianceis defined as the difference between the quantity of actual inputs used
(such as pounds of materials) and the quantity of inputs that should have been used (the flexible
budget for any units of good output achieved), multipled by the budgeted price.
- Efficiency Variances =
(Act Qty Used - Std Qty Used) x (Std
Cost)
- You have Efficiency Usage Variances for both Material
and Labor Used in Production
Other Terms:
- Effectiveness is the degree to which a predetemined objective or target is met.
- Efficiency is the degree to which
inputs are used in relation to a given level of outputs.
Advantages of using standard costs:
- Improve cost control
- More useful information for managerial planning and decision making
- More reasonable inventory measurements.
- Cost savings in record-keeping.
- Possible reductions in production costs
incurred.
Some disadvantages of using standard costs:
- Controversial materiality of the variance
- Nonreporting of some varianes.
- Low morale for some workers.
The Roles:
- The Purchasing Manager
role in the development of standards includes establishing the
standard cost for material required by the bill of materials, determining if the company
should take advantage of price reductions available through economic order size, and obtaining
data regarding the availability of materials. The purchasing manager has the specialized knowledge
about the likely cost of material.
- The Industrial Engineer
role in the development of standards includes preparing the bill
of materials that specifies the types and quantities of material required, establishing, in conjunction
with the manufacturing supervisor, any allowances for scrap, shrinkage and waste, and participating
in time studies and test runs to facilitate the establishment of time standards.
- The Cost Accountant
role involves decision control, or ratifying and
monitoring the standards. This includes reviewing all information
regarding material and labor standards received from other
departments, establishing the labor rate standards based on type
of labor required, determining application rates for indirect
costs such as material handling and manufacturing overhead, and
converting physical standards such as hours and quantities to
monetary equivalents.
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