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Standard Costs

Standard Costs are. Standard Costs. Based on carefully predetermined amounts. Used for planning labor and material requirements. The expected level of performance. Benchmarks for measuring performance. Management by Exception.

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Standard Costs

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  1. Standard Costs are Standard Costs Based on carefullypredetermined amounts. Used for planning labor and material requirements. The expected levelof performance. Benchmarks formeasuring performance.

  2. Management by Exception Managers focus on quantities and coststhat exceed standards, a practice known asmanagement by exception. Standard Amount DirectMaterial DirectLabor Type of Product Cost

  3. Variance Analysis Cycle Takecorrective actions. Identifyquestions. Receive explanations. Conduct next period’s operations. Analyze variances. Prepare standard cost performance report. Begin

  4. Standard Cost Variances Price Variance Quantity Variance The difference betweenthe actual price and thestandard price The difference betweenthe actual quantity andthe standard quantity Cost Variance Analysis

  5. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance A General Model for Variance Analysis AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard PriceAP = Actual Price SQ = Standard Quantity

  6. What clues help me to determine the variances that I should investigate? Significance of Cost Variances • Size of variance • Dollar amount • Percentage of standard • Recurring variances • Trends • Controllability • Favorable variances • Costs and benefits of investigation

  7. Advantages Advantages of Standard Costing Sensible CostComparisons Management byException PerformanceEvaluation EmployeeMotivation

  8. Operational Control Measures in Today’s Manufacturing Environment • Raw Material and Scrap Control • Inventory Control • Machine Performance • Product Quality • Production and Delivery • Productivity • Innovation and Learning

  9. Manufacturing Cycle Efficiency Process TimeManufacturing Cycle Time = Production and Delivery Performance Measures Order Received ProductionStarted Goods Shipped Process Time + Inspection Time+ Move Time + Waiting Time Wait Time Manufacturing Cycle Time Delivery Cycle Time

  10. Exh.10-8 The Balanced Scorecard Financial Perspective How do we lookto the firm’s owners? Internal OperationsPerspective In which activities must we excel? Customer Perspective How do our customers see us? Innovation andLearning PerspectiveHow can we continuallyimprove and create value?

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