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you were building a new home, how much sheetrock (wall board) would you need for the job? In
calculating the quantity you would begin with the overall wall dimensions and back out the area for
windows and doors. But, you would also realize that some of the cutouts for windows would result in
useless scrap material. In addition, it is inevitable that some material will be damaged or cut in error. In
estimating the quantity of material, you will want to provide for such elements, but you also realize that
excess material may not be easily returned without cost. Determining the right quantity of sheetrock is
much like setting standards in a business environment.
Standard setters need to understand waste, spoilage, evaporation, and other characteristics that
consume raw materials. Standard setters need to be mindful of how much time it takes to perform
certain tasks, remembering that humans will make mistakes and need time to correct them. Humans
must also have periods of rest. Standards are applicable to manufacturing and nonmanufacturing
tasks. Even the accountants who are seen as the monitors of standards are themselves subject to
standards. An auditor may be allowed a certain number of hours to audit payroll, verify a bank
reconciliation, and so forth. Without standards, the tasks may expand in scope and time, beyond
what is prudent or necessary.
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20 Standard Costs Tools for Enterprise Performance Evaluation Although performance reports may be prepared by managerial accountants, the standards
themselves should originate with personnel who best understand the productive process. These
personnel should develop standards that are based on realistic information derived from careful
study of business processes. For example, an industrial engineer may engage in time and motion
studies to determine the appropriate amount of time to complete a given task. Past data may be used
to provide realistic measures of the raw material quantity that is needed to complete a finished unit.
Some standards are based on averages; total estimated costs are divided by total estimated output or
activity. For example, standard variable overhead can be determined by dividing estimated variable
overhead by the estimated activity level for the upcoming period. Likewise, fixed standard per-unit
overhead would be determined by dividing estimated fixed overhead by the estimated activity level. 3.2 Philosophy of Standards
It has probably already occurred to you that standards can be set very tight, allowing almost no
room for waste or rest. Or, management may adopt a more realistic set of standards that are within
reach. After all, standards are somewhat like goals. In playing a round of golf, most players will see
“par” as a benchmark against which to compare a score; realistically, few players expect to achieve
“par” on a consistent basis. Nevertheless, it constitutes a standard. At other times, golfers will
calculate their “handicap” to determine a target score they plan to shoot on a given ro...
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