Notes_Chapter_11 - Chapter 11: STANDARD COSTS & THE...

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I. STANDARD COSTS A. Definition : costs that should be incurred under efficient operations. Usually includes: (1) Quantity Standards and (2) Cost (price) standards Used as a benchmark for measuring performance EXAMPLE: Cost/unit DM 3 lbs.*$2.00/lb $ 6.00 DL 2 hrs*$8.00/hr $16.00 OH applied $ 7.00 Total Standard Cost/Unit $29.00 Note : A standard is a unit amount; a budget is a total amount B. How are standard costs developed ? The standard for each cost element is derived from a consideration of the standard price to be paid and the standard quantity to be used. Standards should encourage efficient future operations Two major types of standards: 1. Ideal standards 2. Practical (Normal) standards 1
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Standard Cost for Direct materials : The Direct materials price per lb., gallon, yard, etc. should include an amount for related costs such as receiving, storing, and handling and should be reduce by any discounts; the quantity standard should include allowances of unavoidable waste and normal spoilage. Standard Cost for Direct labor : The direct labor rate generally includes employer payroll taxes and fringe benefits; the quantity standard should make allowances for rest periods, cleanup, machine setup and downtime. The manufacturing overhead standard is based on a standard predetermined overhead rate C. Why are standard costs are used? 1.
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Notes_Chapter_11 - Chapter 11: STANDARD COSTS & THE...

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