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ACCT 2230 (113)

Managerial Accounting Chapter Ten Notes

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University of Guelph
ACCT 2230
Elliot Currie

Chapter Ten Standard Costs and Overhead Analysis y Standard Costs Management by Exception o A standard is a benchmark or norm for measuring performance Standards are widely used in managerial accounting where they relate to the quantity and cost of inputs used in manufacturing goods or providing serviceso Quantity and cosy standards are set for each major input such as raw materials and labour time Quantity standards specify how much of an input should be used to make a unit of product or provide a unit of service Cost price standards specify how much should be paid for each unit of the input Actual quantities and actual costs of inputs are compared to these standardso If either the quantity or the cost of inputs departs significantly from the standards managers investigate the discrepancy to find the cause of the problem and eliminate it This process is called management by exceptiono This basic approach to identifying and solving problems is used in the variance analysis cycle The cycle begins with the preparation of standard cost performance reports in the accounting department These reports highlight the variances which are the differences between actual results and what should have occurred according to the standardso Who Uses Standard CostsManufacturing service good and not for profit organizations all make use of standards to some extent Manufacturing companies often have highly developed standard costing system in which standards relating to materials labour and overhead are developed in detail for each separate product A standard cost card shows the standard quantities and costs of the inputs required to produce a unit of a specific producty Setting Standard Costs o The standard should be designed to encourage efficient future operations not a repetition of past operations that may or may not have been efficiento Ideal versus Practical StandardsIdeal standards are those that can be attained only under the best circumstances They allow for no machine breakdowns or other work interruptions and they call for a level of effort that can be attained only by the most skilled and efficient employees working at peak effort Practical standards are defined as standards that are tight but attainable They allow for normal machine downtime and employee rest periods and they can be attained through reasonable although highly efficient efforts by the average employeeo Setting Direct Materials StandardsThe standard price per unit is the price that should be paid for a single unit of materials including allowances for quality quantity purchased shipping receiving and other such costs net of any discounts allowed The standard price reflects a particular grade of material delivered by a particular type of carrier Allowances have also been made for handling and discounts If everything proceeds according to these expectations the net standard price would be the number calculated Example Purchase price XXX
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