Chapter_10_Lecture_Notes - Chapter 10 Lecture Notes I....

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Chapter 10 Lecture Notes I. Standard costs – management by exception A. Basic definitions/concepts i. A standard is a benchmark or “norm” for measuring performance. In managerial accounting, two types of standards are commonly used: 1. Quantity standards specify how much of an input should be used to make a product or provide a service. 2. Cost (price) standards specify how much should be paid for each unit of the input. ii. Management by exception is a system of management in which standards are set for various operating activities, with actual results compared to these standards . Any deviations that are deemed significant are brought to the attention of management as “exceptions.” II. Setting standard costs A. General concepts i. Standards should be designed to encourage efficient future operations , not just a repetition of past inefficient operations. ii. Standards tend to fall into one of two categories : 1. Ideal standards can only be attained under the best of circumstances. They allow for no work interruptions and they require employees to work at 100% peak efficiency all of the time. 2. Practical standards are tight but attainable. They allow for normal machine downtime and employee rest periods and can be attained through reasonable, highly efficient efforts by the average worker. a. Practical standards can also be used for forecasting cash flows and in planning inventory. B. Setting direct materials standards i. The standard price per unit for direct materials should reflect the final, delivered cost of the materials, net of any discounts taken. 6
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ii. The standard quantity per unit for direct materials should reflect the amount of material required for each unit of finished product, as well as an allowance for unavoidable waste, spoilage, and other normal inefficiencies. C. Setting direct labor standards i. The standard rate per hour for direct labor includes not only wages earned but also fringe benefits and other labor costs. ii.
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Chapter_10_Lecture_Notes - Chapter 10 Lecture Notes I....

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