Standard Costs And Transactions Notes.docx - Standard Costs...

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Standard Costs and Transactions Standard Cost Foundation: The supplemental reading on I-Learn will serve as the primary foundation for standard costs. A standard is a benchmark for measuring performance. The standard is used in the inventory valuation system and provides a way to evaluate actual performance against a benchmark. It is a key component in a control system. Controls System Example: There are three elements to all control systems: 1. Predetermined, standard performance level 2. Measure actual performance 3. Comparison of standard and actual performance The standard cost of a product is a predetermined, standard performance level and allows us to compare to actual results with the calculation of variances. There are two types of standards a company can choose to calculate: Ideal Standards are standards that do not allow for normal waste and work interruption due to breakdown of machinery, employees’ rest periods, shortage of raw materials or any other reason. The achievement of such standards requires highly skilled and motivated workers and the best possible use of production facilities. They can only be achieved under the best and perfect work circumstances. Practical Standard are standards that are challenging but achievable through the use of efficient and motivated workers under normal working conditions. They allow for work interruptions because of machine breakdowns, workers’ rest periods and other conditions that are considered normal in a particular work environment. As most companies using a standard costing system set practical standards, we will illustrate the use of these standards. A standard cost is made up of two parts— quantity and Price . The quantity and price relate to the inputs , which are materials, labor, and overhead . The standard cost relates to the output , or finished product. The standards for material, labor, and overhead for a finished product are summarized on a standard cost card .

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