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Chapter 10

ACC406 Chapter 10.doc

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Ryerson University
ACC 406
Donna Zathy

ACC406 - Chapter 10 • Unit Standards o Most operating managers recognize the need to control costs  Often means the difference between success and failure or between above-average profits and lesser profits o To determine the unit standard cost for a particular input, 2 decisions must be made:  1) The amount of input that should be used per unit of output (the quantity decision)  2) The amount that should be paid for the quantity of the input to be used (the pricing decision) o Quantity Decision produces Quantity Standards o Pricing Decision produces Price Standards  Unit Standard Cost = Quantity Standard x Price Standard • How Standards Are Developed o Price standards are the joint responsibility of operations, purchasing, personnel, and accounting  Operating personnel determine the quality of the inputs required  Personnel and Purchasing have the responsibility of acquiring the labor and materials quality requested at the lowest price  Accounting is responsible for recording the price standards as well as for preparing reports that compare actual performance with the standard • Types of Standards o Ideal Standards = Demand maximum efficiency and can be achieved only if everything operates perfectly o Currently Attainable Standards = Can be achieved under efficient operating conditions  Offers most behavioural benefits • Why Standard Cost Systems Are Adopted o Two reasons for adopting a standard cost system  Planning and Control • Standard costing systems enhance planning and control, improve performance measurement • Unit standards are a fundamental requirement for a flexible budgeting system • Budgetary control systems compare actual costs with budgeted costs by comparing variances (difference between actual and planned)  Product Costing • In a standard costing system, costs are assigned to products using quantity and price standards for all three manufacturing costs: Direct Materials, Direct Labor, Overhead • In an actual costing system, it assigns the actual costs of all three manufacturing inputs to products • In a normal costing system, it predetermines overhead costs for the purpose of product costing, but assigns direct materials and direct labor to products by using actual costs o Assigns actual direct costs to products but allocates budgeted indirect costs to products using a budgeted rate and actual activity • Standard Product Costs o Developed for direct materials, direct labor, and overhead  Using these costs, standard cost per unit is calculated o Standard Cost Sheet = Provides the production data needed to calculate the standard unit cost  Reveals the quantity of each input that should be used to produce one unit of output  Unit Quantity Standard can be used to compute the total amount of inputs allowed for the actual output • Essential component in computing efficiency variances • Standard Quantity of Materials Allowed (SQ) = Unit Quantity Standard x Actual Output • Standard Hours Allowed (SH) = Unit Labor Standard x Actual Output o Standard usage for variable and fixed overhead is tied to the direct labor standards • Variance Analysis: Gene
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