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CHAPTER 9 STANDARD COSTING: A FUNCTIONAL-BASED CONTROL APPROACH The responsibilities of management include planning, controlling, and decision making. Chapter 8 discussed static and flexible budgeting, which have a significant impact on the functions of planning and controlling. Flexible budget variances provide significant information for control. Chapter 9 continues the explanation of the control function by looking at standard costing. LEARNING OBJECTIVES After studying Chapter 9, you should be able to: 1. Describe how unit input standards are developed, and explain why standard costing systems are adopted. 2. Explain the purpose of a standard cost sheet. 3. Compute and journalize the direct materials and direct labor variances, and explain how they are used for control. 4. Compute overhead variances three different ways, and explain overhead accounting. 5. Calculate mix and yield variances for direct materials and direct labor. KEY TOPICS The following major topics are covered in this chapter (related learning objectives are listed for each topic). 1. Developing Unit Input Standards (LO 1) 2. Standard Cost Sheets (LO 2) 3. Variance Analysis and Accounting: Direct Materials and Direct Labor (LO 3) 4. Variance Analysis: Overhead Costs (LO 4) 5. Mix and Yield Variances: Materials and Labor (LO 5) I. DEVELOPING UNIT INPUT STANDARDS Developing standards for input prices and input quantities allows a more detailed understanding of the sources of flexible budget variances and improves the overall control function. To determine the unit standard cost for a particular input, two decisions must be made: 1. How much of the input should be used per unit of output? (Quantity decision) 2. How much should be paid for the quantity of the input to be used? (Pricing decision) Unit standards are of two types: quantity standards and price standards . Quantity standards are concerned with how much of an input should be used. Price standards are concerned with how much should be paid per unit of input. Standards can be classified as either ideal or currently attainable. Ideal standards demand maximum efficiency and can be achieved only if everything operates perfectly. Currently attainable standards are achievable under efficient operating conditions. Conventional wisdom favors currently attainable standards because ideal standards are too demanding and can prove to be frustrating to workers and managers. Another type of standard known as a kaizen standard is also possible. Kaizen standards are continuous improvement standards. A Kaizen standard is considered to be a currently attainable standard and focuses on planned improvement and cost reduction. Because of the emphasis on continuous 1
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improvement, the standards are constantly changing. Kaizen standards are discussed more thoroughly in
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