As production volumes ramp up and down to meet

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Unformatted text preview: up and down to meet customer demand, computerized flexible budgets are adjusted on a real-time basis to send signals throughout the modern organization (including electronic data interchange with suppliers). The net result is that the supply chain is immediately adjusted to match raw material orders to real production levels, thereby eliminating billions and billions of dollars of raw material waste and scrap. your chance Please click the advert to change the world Here at Ericsson we have a deep rooted belief that the innovations we make on a daily basis can have a profound effect on making the world a better place for people, business and society. Join us. In Germany we are especially looking for graduates as Integration Engineers for • Radio Access and IP Networks • IMS and IPTV We are looking forward to getting your application! To apply and for all current job openings please visit our web page: Download free ebooks at 19 Standard Costs Tools for Enterprise Performance Evaluation 3. Standard Costs Budgets deal with total expected costs. But, as you saw for Mooster’s Dairy, these overall estimates are based upon fundamental assumptions about standard quantity and cost of inputs required in producing a single unit of output. Recall for Mooster: “. . . direct materials are variable and anticipated to be $1 per gallon ($100,000 in total), direct labor is variable and anticipated to be $.50 per gallon ($50,000 in total), and variable factory overhead is expected to be $1.50 per gallon ($150,000 in total).” Standards are the predetermined expectation of the inputs necessary to achieve a unit of output. Standard costs provide an assessment of what those inputs should cost. Standards are important ingredients in planning and controlling a business. You have just seen how they influence the budget preparation process. They are also integral to the assumptions needed for proper cost-volume-profit analysis discussed in an earlier chapter. Standards can also be used in pricing goods and services. Perhaps you have had your car repaired; the bill is likely based on an hourly rate applied to a standard number of hours for the job (your specific repair might have actually taken more or less time). This chapter will look at how standards are used for performance evaluation via measures of efficiency and cost incurrence. You have perhaps worked in a restaurant. Each cashier may have a standard for how much business they must “ring.” Managers have standards for how many tables must be “turned.” The bus staff is allowed only so much “breakage.” Virtually every business has a similar set of standards. In a traditional manufacturing environment, a unit of finished goods is decomposed into its components to determine how much raw material, labor, and overhead is necessary to produce the item. These component quantities are then considered in terms of what they should cost. 3.1 Setting Standards The decision about the quantity and cost of productive components is more complex than it may seem. I...
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