Chapter 10 - Standard Costing A Managerial Control Tool

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10 Apr 2012
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Wednesday March 14th, 2012
Chapter 10
Standard Costing: A Managerial Control Tool
Unit Standards:
-most managers recognize the need to control costs
-cost control often means the difference between success and failure or between above average profits
and lesser profits, cost control means that managers must be cost conscious and assume responsibility
for important objectives
-by comparing the actual costs and actual experiences with the corresponding budget amounts at the
same level of activity, a measure of managerial efficiency emerges
-the process described provides significant information for control, developing standards for unit
amounts as well as for total amounts which can enhance control
-in order to determine the unit standard cost for a particular input, 2 decisions must be made:
Amount of input that should be used per unit of output (quantity decision)
Amount that should be paid for the quantity of the input to be used (pricing decision)
-quantity decision produces “quantity standards”
-pricing decision produces “price standards”
-unit standard cost can be computed by multiplying these 2 standards:
Quantity Standard X Price Standard
How Standards Are Developed:
-historical experiences, engineering studies and input from operating personnel are 3 potential sources
of quantitative standards
historical experiences: many provide an initial guideline for setting standards, should are used
with caution, usually processes are operating inefficiently, adopting input output relationships
from the past thus perpetuates these inefficiencies
engineering studies: determine the most efficient way to operate and can provide rigorous
guidelines; however standards are often too rigorous
operating personnel are accountable for meeting standards, they should have significant input
in setting standards, same principles governing participative budgeting pertain to setting unit
standards
Type of Standards:
-standards are generally classified as either ideal or currently attainable
Ideal Standards: demand maximum efficiency and can be achieved only if everything operates
perfectly, no machine breakdown, slack or lack of skill is allowed
Currently Attainable Standards: can be achieved under efficient operating conditions, allowance
is made for normal breakdowns, interruptions, less than perfect skill
-if standards are too tight and never achievable, workers become frustrated and performance level
declines
-challenging but achievable standards tend to be extract higher performance levels, particularly when
the individual subjects to the standards have participated in their creation
Why Standard Costs Are Adopted:
-there are 2 reasons for adopting a standard cost system
1. Improve planning and control
2. Facilitate product costing
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