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ch10 - Managerial Accounting Chapter 10 Standard Analysis...

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Managerial Accounting Chapter 10 – Standard Analysis & Scorecards
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Highlights What are ideal and practical standards? How are direct materials and direct labor standards set? How do we use variances to analyze production and ordering problems? What are exceptions and which should be looked at?
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Standard Cost Terms Standard Standard = benchmark or “norm” used to measure performance Quantity Standard Quantity Standard = how much of an input should be used in manufacturing a unit or performing a service Cost/Price Standard Cost/Price Standard = cost per unit of each input To measure performance actual are compared to both standard quantities and costs
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IDEAL VS. PRACTICAL STANDARDS Ideal standards allow for no machine break-downs or work interruptions, and can be attained only by working at peak effort 100 percent of the time. Such standards: often discourage workers; shouldn’t be used for decision making. Practical standards allow for “normal” machine down time, employee rest periods, and the like. Such standards: are felt to motivate employees, since the standards are “tight but attainable;” are useful for decision purposes, since variances from standard will contain only “abnormal” elements.
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DIRECT MATERIAL STANDARDS To illustrate the use of standard costs, consider Speeds, Inc. which manufactures a popular jogging suit. The company wishes to have standard costs developed for the suit in terms of material, labour, and variable overhead. The standard price per unit for direct materials should be the final, delivered cost of materials. The standard price should reflect: Specified quality of materials. Quantity discounts. Transportation (freight) costs. Receiving and handling costs.
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DIRECT MATERIAL STANDARDS (cont’d) The standard quantity per unit for direct materials is the amount of material that should go into each finished unit of product. The standard quantity should reflect: Engineered (bill of materials) requirements. Expected spoilage of raw materials. Unavoidable waste of materials in the manufacturing process. Materials in scrapped work in process (rejects).
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Standard Cost of Materials EXAMPLE: The standard quantity of verilon that goes into one jogging suit is computed as follows: Bill of materials requirement 2.8 metres Allowance for waste 0.6 metres Allowance for rejects 0.1 metres Standard quantity per jogging suit 3.5 metres Once the price and quantity standards have been set, the standard cost of materials (verilon) for one unit of finished product can be computed: 3.5 metres per jogging suit x $6 per metre = $21 per jogging suit 
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DIRECT LABOUR STANDARDS The standard rate per hour for direct labour should include all costs associated with direct labour workers.
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