Chapter 8

Chapter 8 - Chapter 8 Standard Costs-Management by...

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Chapter 8 Standard Costs—Management by Exception I. Standard Costs—Management by Deception a. Managers set quantity and cost standards for each major input such as raw materials and labor time. b. Quantity Standards specify how much of an input should be used to make a product or provide a service. c. Cost (price) Standards specify how much should be paid for each unit of the input. d. Actual quantities and costs are compared to the standards. e. Variance Analysis Cycle i. Preparation of standard cost performance reports in accounting department. ii. Variances are found, corrected and next periods operations are carried out. f. Standard Cost Card – shows the standard quantities and costs of the inputs required to produce a unit. II. Setting Standard Costs a. Ideal Versus Practical Standards i. Ideal Standards – can be attained only under the best circumstances. 1. Managers feel such standards spur continual improvement. 2. Few organizations use them. 3. Variances are difficult to interpret. ii. Practical Standards – standards that are tight but attainable 1. Allow for normal machine downtime and employee rest periods. 2. Signal a need for management attention because they represent deviations that fall outside of normal operating conditions. 3. Can serve multiple purposes. a. Forecasting cash flows b. Planning inventory III. Setting Direct Material Standards a. Standard Price per Unit – should reflect the final delivered cost of the materials, net of any discounts taken. b. Standard Quantity per Unit – should reflect the amount of material required for each unit of the finished product, as well as an allowance for unavoidable waste, spoilage, and other normal inefficiencies. c. Bill of Materials – lists the quantity of each type of material going into a unit of finished product i. Handy source for determining basic material input per unit but it should be adjusted for waste and other factors IV. Setting Direct Labor Standards
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a. Standard Rate per Hour –
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This note was uploaded on 04/18/2008 for the course ACCT 202 taught by Professor Steedle during the Spring '07 term at Towson.

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Chapter 8 - Chapter 8 Standard Costs-Management by...

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