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CHAPTER 10 The Need for Standards

CHAPTER 10 The Need for Standards. Standards Are common in business They are often imposed by government agencies (and called regulations) Standard costs Are predetermined unit costs They are often used as measures of performance. Distinguishing Between Standards and Budgets.

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CHAPTER 10 The Need for Standards

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  1. CHAPTER 10The Need for Standards • Standards • Are common in business • They are often imposed by government agencies (and called regulations) • Standard costs • Are predetermined unit costs • They are often used as measures of performance

  2. Distinguishing Between Standards and Budgets • Standards and budgets are both • Pre-determined costs • They are both part of management planning and control • A standard is a unit amount whereas a budget is a total amount

  3. Advantages of Standard Costs

  4. Setting Standard Costs There are two levels of standard costs • Ideal standards represent optimum levels of performance under perfect operating conditions • Normal standards represent efficient levels of performance attainable under expected operating conditions (rigorous but attainable)

  5. Direct Materials Price Standard • Direct materials price standard • Is the cost per unit which should be incurred • It is based on the industrial engineer’s estimated use of materials and the purchasing department’s best estimate of the cost of materials • Includes related costs such as receiving, storing, and handling

  6. Direct Materials Efficiency Standard • Direct materials efficiency standard • Is the quantity of direct materials used per unit of finished goods • It is based on physical measures such as pounds, barrels, etc. • Considers both the quantity and quality of materials required • Includes allowances for unavoidable waste

  7. STANDARD DIRECT MATERIALS PRICE STANDARD DIRECT MATERIALS QUANTITY STANDARD DIRECT MATERIALS COST PER UNIT x = Total Direct Materials Cost/Unit • The standard direct materials cost per unit is calculated as follows

  8. Direct Labor Price Standard • Direct labor price standard • Is the rate per hour incurred for direct labor • It is based on current wage rates adjusted for anticipated changes, such as cost of living adjustments • Includes employer payroll taxes,and fringe benefits

  9. Direct Labor Efficiency Standard • Direct labor efficiency standard • Is the time required to make one unit of the product • It is critical in labor-intensive companies • Allowances should be made for rest periods, cleanup, machine setup, and machine downtime

  10. STANDARD DIRECT LABOR RATE STANDARD DIRECT LABOR HOURS STANDARD DIRECT LABOR COST PER UNIT x = Direct Labor • The standard direct labor cost per unit is calculated as follows

  11. Manufacturing Overhead Standard • For manufacturing overhead, a standard predetermined overhead rate is used • The predetermined rate is computed by dividing budgeted overhead costs by an expected standard activity level • The standard manufacturing overhead rate per unit is the predetermined overhead rate times the standard activity level (for example, direct labor hours)

  12. Standard Cost Per Unit • Standard cost per unit • Sum of the standard costs for direct materials, direct labor, and manufacturing overhead

  13. Variances from Standards • Variances from standards • Are differences between total actual costs and total standard costs • Unfavorable variances occur when too much is paid for materials and labor or when there are inefficiencies in using materials and labor • Favorable variances occur when there are efficiencies in incurring costs and in using materials and labor

  14. Variance Relationships

  15. Formula for Materials Price Variance • Thematerials price varianceis determined from the following formula: MPV = (AP – SP)AQ Actual Quantity x Actual Price (AQ) x (AP) Actual Quantity x Standard Price (AQ) x (SP) Materials Price Variance (MPV) _ =

  16. Formula for Materials Efficiency Variance • The materials efficiency varianceis determined from the following formula: MQV = (AQ – SQ)SP Materials Quantity Variance (MQV) Actual Quantity x Standard Price (AQ) x (SP) Standard Quantity x Standard Price (SQ) x (SP) _ =

  17. Actual Hours x Actual Rate (AH) x (AR) Actual Hours X Standard Rate (AH) x (SR) Labor Price Variance (LPV) _ = Formula for Labor Price Variance • The formula for the labor price variance is as follows: LPV = (AR – SR)AH or LPV = (AP – SP)AQ

  18. Formula for Labor Efficiency Variance • The labor efficiency variance is derived from the following formula: LQV = (AH – SH)SR or LQV = (AQ - SQ)SP Labor Quantity Variance (LQV) Actual Hours x Standard Rate (AH) x (SR) Standard Hours x Standard Rate (SH) x (SR) _ =

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