RSM322H1 Lecture Notes - Lecture 12: Decision Management, Purchasing Manager, Direct Labor Cost
Document Summary
Definition: the expected cost that is reasonably required to achieve a given objective under specified conditions. Standards can be better predictors of future costs than actual past costs. Can be used in product pricing, bidding, and outsourcing decisions. Set performance expectations or benchmarks for the costs of products, processes, or sub- components. Variances from standards get attention of managers. Tight standards motivate higher performance (decision control). Loose standards allow more discretion (decision management). Frequent revision would reduce incentives to control costs. Target costing is a technique used for new product planning. Market planners begin with selling price required to achieve a desired market share. Selling price - desired profit = total target cost. Assign portion of total target costs to marketing, engineering, and manufacturing departments. Variances measure the difference between actual and standard costs. Favorable (f) variance, if actual < standard. Unfavorable (u) variance, if actual > standard. Variances alert managers to deviations from plan.
