A report on the process of Standard costing

we study direction control and public presentation steps. Quite frequently, these footings carry with them negative intensions – we may hold a inclination to believe ofperformance measuring as something to be feared. And so, public presentation measurings can be used in really negative ways – to project incrimination and to penalize. However, that is non the manner they should be used. Performance measuring serves a critical map in both personal life and in organisations. Performance measuring can supply feedback refering what works and what does non work, and it can assist actuate people to prolong their attempts.

In this subdivision we see how assorted steps are used to command operations and to measure public presentation. Even though we are get downing with the lowest degrees in the organisation, maintain in head that public presentation steps should be derived from the organisation ‘s overall scheme. For illustration, a company like Sony that bases its scheme on rapid debut of advanced consumer merchandises should utilize different public presentation steps than a company like Federal Express where on-time bringing, client convenience, and low cost are cardinal competitory advantages. Sony may desire to maintain close path of the per centum of grosss from merchandises introduced within the last twelvemonth ; whereas Federal Express may desire to closely supervise the per centum of bundles delivered on clip.

Company in extremely competitory industries like Federal Express, Southwest air hoses, Dell Computer, Shell Oil, andToyota must be able to supply high quality goods and services at low cost. If they do non, they will die. Stated in the starkest footings, directors must obtain inputs such as natural stuffs and electricity at the lowest possible monetary values and must utilize them every bit efficaciously as possible – while keeping or increasing the quality of the end product. If inputs are purchased at monetary values that are excessively high or more inputs are used than is truly necessary, higher costs will ensue. They could analyze every dealing in item, but this evidently would be an inefficient usage of direction clip. For many companies, the reply to this control job lies at least partly in standard costing system.

Standard Costs – Management by Exception:

A standard cost is the preset cost of fabricating a individual unit or a figure of merchandise units during a specific period in the immediate hereafter. It is the planned cost of a merchandise under current and/or anticipated operating conditions.

Puting Standard Costs – Ideal Versus Practical Standards:

Puting monetary value and measure criterions requires the combined expertness of all individuals who have duty over input monetary values and over effectual usage of inputs. In a fabrication house, this might include comptrollers, buying directors, applied scientists, production supervisors, line troughs, and production workers. Past records of purchase monetary values and input use can assist in puting criterions. However, the criterions should be designed to promote efficient future operations, non a repeat of past inefficient operations.

Direct Materials Standards and Variance Analysis:

Direct Materials Price and Quantity Standards:

Standard monetary value per unit of direct stuffs is the monetary value that should be paid for a individual unit of stuffs, including allowances for quality, measure purchased, transportation, receiving, and other such costs, cyberspace of any price reductions allowed.

Direct Materials Price Discrepancy:

Direct stuffs monetary value discrepancy is the difference between the existent purchase monetary value and standard purchase monetary value of stuffs. Direct stuffs monetary value discrepancy is calculated either at the clip of purchase of direct stuffs or at the clip when the direct stuffs are used.

Direct Materials Quantity Variance:

Direct stuffs measure discrepancy or Direct stuffs usage discrepancy measures the difference between the measure of stuffs used in production and the measure that should hold been used harmonizing to the criterion that has been set. Although the discrepancy is concerned with the physical use of stuffs, it is by and large stated in dollar footings to helpgauge its importance.

Direct Labor Standards and Variance Analysis:

Direct Labor Rate and Efficiency Standards:

Direct labour monetary value and measure criterions are normally expressed in footings of a labour rate and labour hours. The standard rate per hr for direct labour includes non merely rewards earned but besides fringe benefit and other labour costs.

Direct Labor Rate | Price Discrepancy:

Direct Labor monetary value discrepancy is besides termed as direct labour rate discrepancy. This discrepancy measures any divergence from criterion in the mean hourly rate paid to direct labour workers.

Direct Labor Efficiency | Usage | Quantity Variance:

The measure discrepancy for direct labour is by and large called direct labour efficiency discrepancy or direct labour use discrepancy.

Manufacturing Overhead Standards and Variance Analysis:

Manufacturing Overhead Standards:

Procedures for the establishing and utilizing standard mill overhead rates are similar to the methods of covering with the estimated direct and indirect mill operating expense and its application to occupations and merchandises.

Factory Overhead Discrepancies:

Jobs or procedures are charged with cost on the footing of standard hours allowed multiplied by the standard mill over caput rate. The standard operating expense rate or predetermined overhead rate is discussed in item at our occupation order bing system page. The standard hours allowed figure is determined by multiplying the labour hours required to bring forth one unit ( the criterion labour hours per unit ) times the existent figure of units produced during the period. The units produced are the tantamount units of production for the departmental mill operating expense cost being analyzed. At the terminal of the month, overhead really incurred is compared with the disbursals charged into procedure utilizing the standard mill overhead rate. The difference between these figures is called the overall or net mill overhead discrepancy.

Case

Factory Overhead Variance Analysis:

Strayer Company uses a criterion cost system and budgets the undermentioned gross revenues and costs for 2009

Unit of measurement gross revenues

20,000

Gross saless

$ 2,00,000

Entire production cost at criterion

130,000

Gross net income

70,000

Get downing stock lists

None

Ending stock lists

None

The 2009 budgeted gross revenues degree was the normal capacity degree used in ciphering the mill operating expense predetermined standard cost rate per direct labour hr.

At the terminal of 2009, Strayer Company reported production and gross revenues of 19,200 units. Entire mill operating expense incurred was precisely equal to budgeted mill operating expense for the twelvemonth and there was under-applied entire mill operating expense of $ 2,000 at December 31. Factory operating expense is applied to the work in process stock list on the footing of standard direct labour hours allowed for units produced. Although there was a favourable labour efficiencyvariance, there was neither a labour rate discrepancy nor stuffs discrepancies for the twelvemonth.

Require: An account of the under-applied mill operating expense of $ 2,000, being every bit specific as the information license and bespeaking the overhead discrepancies affected. Strayer uses a three discrepancy method to analyse the entire mill operating expense.

Solution

Under-applied mill operating expense will originate when existent mill operating expense incurred is larger than the standard sum of mill overhead applied to work in procedure. The standard sum of mill overhead applied to work in procedure is based on existent instead than on budgeted units of end product.

Based on the information given, the amount of the mill overhead disbursement, efficiency, and idle capacity discrepancies resulted in an unfavourable entire mill overhead discrepancy of $ 2,000.

The mill overhead efficiency discrepancy must be favourable because it is computed on the same footing as the direct labour efficiency discrepancy which was given as favourable.

Strayer would hold an unfavourable idle capacity discrepancy because the existent activity degree for the twelvemonth was less than the capacity degree used in ciphering the standard cost rate for mill operating expense.

As to the mill overhead disbursement discrepancy, the balance would be unfavourable because existent costs would hold had to transcend the budgeted cost of the existent units produced since the budget allowance for productionof 19,200 units must be less than for 20,000 units and the existent costs were precisely equal to the budget allowance for 20,000 units. The magnitude of the disbursement discrepancy is undetermined from the information given.

Case:

Consequence of Assumed Standard Levels:

Harden Company has experienced increased production costs. The primary country of concern identified by direction is direct labour. The company is sing following a criterion cost system to assist command labour and other costs. Useful historical informations are non available because elaborate production records have non been maintained.

To set up labour criterions, Harden Company has retained an technology consulting house. After a complete survey of the work procedure, the advisers recommended a labour criterion of one unit of production every 30 proceedingss, or 16 units per twenty-four hours for each worker. The advisers further advised that Harden ‘s pay rates were below the predominating rate of $ per hr.

Harden’s production vice-president thought that this labour criterion was excessively tight, and from experience with the labour force, believed that a labour criterion of 40 proceedingss per unit or 12 units per twenty-four hours for each worker would be more sensible.

The president of Harden Company believed the criterion should be set at a high degree to actuate the workers and to supply equal information for control and sensible cost comparing. After much treatment, direction decided to utilize a double criterion. The labour criterion of one unit every 30 proceedingss, recommended by the confer withing house, would be employed in the works as a motive device, while a cost criterion of 40 proceedingss per unit would be used in describing. Management besides concluded that the workers would non be informed of the cost criterion used for describing intents. The production vice-president conducted several Sessionss prior to execution in the works, informing the workers of the new criterion cost system and replying inquiries. The new criterions were non related to incentive wage but were introduced when rewards were increased to $ 7 per hr.

The criterion cost system was implemented on January 1, 19 — .

Materials quality, labour mix, and works installations and conditions have non changed to any great extent during the six month period.

Required:

A treatment of the impact of different types of criterions on motives, and specifically the likely consequence on motive of following the labour criterion recommended for Harden Company by the technology house.

An rating of Harden Company ‘s determination to use double criterions in its criterion cost system.

Solution:

Standards are frequently classified into three types – theoretical ( tight ) , normal ( sensible ) , or expected existent ( loose ) . Standards which are excessively loose or excessively tight will by and large hold a negative impact on workers motive. If excessively loose, workers will be given to put their ends at this low rate, therefore cut downing productiveness below what is gettable ; if excessively tight, workers will recognize that it is impossible to achieve the criterion, become defeated, and will non try to run into the criterion. An come-at-able or sensible criterion which can be achieved under normal on the job conditions is likely to lend to the worker ‘s motive to accomplish the designated degree of activity.

If executive direction imposes criterions, workers and works direction will be given to respond negatively because they feel threatened. If workers and works direction participate in puting the criterion, they can more readily place with it and it could go one of their personal ends.

In Harden ‘s instance, it appears that the criterion was imposed on the workers by direction. In add-on, direction used an ideal criterion to mensurate public presentation. Both of these actions appear to hold had a negative impact on end product over the first six months.

Harden made a hapless determination to utilize double criterions. If the workers learn of the double criterions, the company ‘s full measuring system may go fishy and credibleness will be lost. Company morale could endure because the workers would non cognize for certain how the company evaluates their public presentation. as a consequence, neglect for the present and any future cost control system may develop.

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