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ACCT 201 Chapter 10 Notes Any control system has 3 basic parts: a standard performance level, an actual performance level, and a comparison between standard and actual. EX: a thermostat. A managerial accountant’s budgetary-control system works like a thermostat. First, a standard cost is set. A standard cost is a budget for the production of one unit of product or service. It is the cost chosen by the managerial accountant to serve as the benchmark in the budgetary-control system. When the firm produces many units, the managerial accountant uses the standard unit cost to determine the total standard or budgeted cost of production. Second, the managerial accountant measures the actual cost incurred in the production process. Third, the managerial accountant compares the actual cost with the budgeted or standard cost. Any difference between the two is called a cost variance . Cost variances are used in controlling costs. Management by exception is a process of following up on only significant cost variances. When operations are going along as planned, actual costs and profit will typically be close to the budgeted amounts. Managerial accountants typically use 2 methods for setting cost standards. Analysis of historical data takes place with a mature production process, where the firm has a lot of experience, historical costs can provide a good basis for predicting future costs. One con to this method is that a seemingly minor change in the way a product is manufactured may make historical data almost totally irrelevant. Task analysis is another way to set cost standards. In this method you analyze the process of manufacturing a product to determine what it should cost in the future. This method stresses what the product should cost and not what it did cost in the past. The accountants typically work with engineers who are familiar with the process. A combined approach can also be used. This is when the accountants combine the two tasks to get a more accurate standard. Standards should not be determined by managerial accountants alone. A perfection (or ideal ) standard is one that can be attained only under m\nearly perfect operating conditions. Such standards assume peak efficiency, the lowest possible
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input prices, the best quality materials obtainable, and no disruption in production due to power failure or machine breakdowns. Managers think that this causes employees to have an incentive to do better since this standard is nearly impossible to attain. However, behavioral scientists disagree. Standards that are as tight as practical, but still are expected to be attained are called practical (or attainable ) standards . Such standards assume a production process that is as efficient as practical under normal operation conditions. Behavioral scientists think that this standard encourages more positive and
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