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Chapter 10

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Department
Rotman Commerce
Course
RSM222H1
Professor
Donna Losell
Semester
Fall

Description
Chapter 10: Standard Costs & Overhead Analysis MANAGING DISTRIBUTION COSTS  Continues the study of planning, control, and performance measurement  Availability of quantitative measures of performance can yield 2 types of benefits: o Performance feedback can help improve the production process through a better understanding of what works and what doesn’t o Feedback on performance can sustain motivation and effort, bc it is encouraging and or bc It suggests that more effort is required for the goal to be met  Standard costs: represents specific elements such as DM or DL requirements as well as OH projections STANDARD COSTS- MANAGEMENT BY EXCEPTION  MBE: a system of mgmt. in which standards are set for various operating activities that are then periodically compared to actual results; any differences that are deemed significant re brought to the attention of mgmt. as “exceptions”  Quantity standards: specify how much of an input should be used to make a unit of product or to provide a unit of service  Cost (price) standards: specify how much should be paid for each unit of input o This approach is used in the variance and analysis cycle; begins w preparation of standard cost performance reports in the acc department  Signi variances are investigated (diff btwn actual results and what should have occurred according to standards)  Corrective actions taken  Cycle begin again w new standard cost performance for the most recent period  Goal is to improve operations not put blame SETTING STANDARD COSTS  Should be designed to encourage efficient future operations not a repetition of past operating Who uses standard costs?  Manu, service, food, and not for profit  Standard cost record: listing of the standard amounts of materials, labour and OH that should go into a unit of product, multiplied by the standard price or rate that has been set for each cost element Ideal vs Practical standards  Ideal standards: allow for no machine breakdowns or other work interruptions and that require peak efficiency at all times o Those that can be attained only under the best circumstances o Few use this bc managers feel that they are discouraging for even the best workers and variances from the standards have little meaning when using ideal standards (large var from the ideal are normal and it is difficult to manage by exception o Cannot be used in normal budgets or plans  Practical standards: are tight but attainable; allow for normal machine downtime and other work interruptions and can be attained through reasonable, although highly efficient, effort by the avg employee o Variances typically signal a need for mgmt. attention bc they re deviations that fall outside normal operating conditions o Can also be used to forecast cash flows and in planning inventory Setting DM standards  Standard price per unit: price that should be paid for a single unit of materials, including shipping, receiving, and other such costs, net of any discounts allowed Purchase price……. xx Freight ……… xx Receiving and handling….. xx – purchase discount….. xx Standard price per km…….. xx  Standard quantity per unit: amount of materials that should be required to complete a single unit of product, including allowances for normal waste, spoilage, and other inefficiencies Materials requirements as specified in bill of materials…xx Allowance for waste and spoilage… xx Allowance for rejects …… xx Standard quantity per unit …….. xx  Bill of materials: details the type and quantity of each item of amterial that should be used in a product  Standard cost of materials per unit of finished product: o Standard quantity per unit x standard price per unit Setting DL standards  Standard rate per hour: the labour rate that should be incurred per hour of labour time, including employment insurance, employee benefits and other labour costs  Standard hours per unit: amount of labour time that should be required to complete a single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and other normal inefficiencies o One approach is to break down each physical task into elemental body movements o Another is an industrial engineer does a time and motion study which involves recording the time required for certain tasks  These 2 ^ are on pg 408-409  Stand labour cost per unit of product: o Standard rate x standard hours Setting variable manufacturing OH standards  Generally in terms of rates and hours  Rate represents that variable portion of the predetermined OH rate o Requires an estimate of both the unit cost of the var OH items as well as the quantity required for the planned level of production  Standard cost per unit: computed by o Standard quantity/hours x standard price/rate for each cost element  Standards and budgets are very similar but the major diff is that a standard is a unit amount while a budget is a total amount o A standard can be viewed as the budgeted cost for one unit of product A general model for variance analysis  Variance: the diff btwn standard prices and quantities and actual P & Q  A price var and quantity var can be computed for all 3 var cost elements (DM, DL, VMO) o Called MPV, LRV, OSV  Although the P var may be called diff names, computed exactly same wehther dealing w DM, DL, or MO  The inputs rep the actual Q of DM, DL, and VMO used; the outputs rep the good producton of the actual output o Standard quantity/hours allowed: amount of materials that should have been used to complete the output; actual # of units produced x the standard Q per unit  SQ x SP reps the flexible budget for the period o Based on standard Q allowed for the actual output achieved x standard price per unit USING STANDARD COSTS- DM VARIANCES  Favourable variance if purchase price was less than standard price (VV)  Standard price used when computing the quantity variance to avoid manager beef btwn purchasing and production manager  Why companies compute the materials price variance when materials are purchased rather than when they are used in production: o Delaying the computation of the price variance until the materials are used would result in less timely var reports if there is a time gap btwn the purchase of materials and their use in production o By computing the price var at the time of purchase, materials can be carried in the inv accounts at their standard cost Materials price variance- a closer look  MPV: a measure of the diff btwn actual unit price paid for an item and the standard price x quantity purchased  Negative variance means F and positive means U  Variances should be isolated and brought to attention if signfi; call them red flags: requires the explanation of responsible manager and follow up effort o Responsibility falls on purchasing manager bc they have control over the price paid for goods  But production manager may be responsible for materials price var  Emphasis not on blame though, but on the control function in the sense of supporting the line managers and assisting them in meeting the goals Materials quantity variance- a closer look  A measure of the diff btwn the actual quantity of materials used In production and the standard quantity allowed x standard price per unit of materials  Best isolated at the time that materials are placed into production  Responsibility of production department to make sure using the materials properly in line w standards o Could be purchasing if the materials bought are unsuitable for use USING STANDARD COSTS- DL VARIANCES Labour rate variance- closer look  LRV: diff btwn actual hourly labour rate and the standard rate x number of hours  Production supervisors bear responsibility for controlling LRV Labour efficiency variance- closer look  LEV: diff btwn the actual hours taken to complete a tsk and the standard hours allowed x the standard hourly labour rate o Measures productivity of labour time  Believed that to increase productivity of
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