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.