Chapter 10 - Standard Costs

Chapter 10 - Standard Costs - Accounting 222 Chapter 10:...

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Accounting 222 Chapter 10: Standard Costs and Balanced Scorecard - Standard Costs o Two most commonly used standards Quality Standards – Specify how much of an input should be used to make a product or service provided Cost (Price Standards) – Specify how much should be paid for each unit of the input o Management by Exception – A management system in which standards are set for various activities, with actual results compared to these standards. Significant deviations from standards are flagged by exceptions. o Variance Analysis Cycle 1. Prepare standard cost performance report 2. Analyze variances 3. Identify question 4. Receive explanations 5. Take corrective actions 6. Conduct next period’s operations o Setting Standard Costs – Accountants, engineers, purchasing agents and production managers combine efforts to set standards that encourage efficient future production Types of Standards Ideal – Standards that assume peak efficiency at all times Practical – Standards that allow for normal machine downtime and other work interruptions and that can be attained through reasonable, through high highly efficient, efforts by the average workers Setting Production Standards Direct Materials o Price Standards – Final, delivered cost of materials, net of discounts o Quality Standards – Summarized on a Bill of Materials
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Direct Labor o Rate Standards – A single rate is used that reflects the mix of wages earned o Time Standards – Use time and motion studies for each labor operation Variable Overhead o Rate Standards – The rate is the variable portion of the POHR o Activity Standards – The activity is the base used to calculate the POHR o Standard Cost Card Standard Quantity * Standard Price = Standard CPU o Standards vs. Budgets Budget – set for TOTAL COSTS Standard – PER UNIT COST Standards help prepare budgets o Price and Quantity Standards are determined separately for 2 reasons: The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw materials used. Purchasing Manager = Raw Material Purchase PRICES Production Manager = QUANTITY of raw materials used The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production. o General Model for Variance Analysis Price Variance – Difference between actual price and standard price Computed on the entire quantity purchased PV = (AQ*AP)-(AQ*SP) PV = AQ (AP-SP) Materials price variance
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Labor rate variance VOH spending variance Quantity Variance – Difference between actual quantity and standard quantity Computed only on quantity used QV = (AQ*SP)-(SQ*SP) QV = SP(AQ-SQ) Materials quantity variance Labor efficiency variance VOH efficiency variance Terms: Actual Quantity – The amount of DM, DL, VOH usually used
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This note was uploaded on 03/17/2009 for the course ACCT 222 taught by Professor Wainberg during the Spring '08 term at UMass (Amherst).

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Chapter 10 - Standard Costs - Accounting 222 Chapter 10:...

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