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Use standard costs to prepare budgets and establish goals for product costing. Calculate variances between standard and actual costs, determine their causes, identify inefficient operations, and take corrective action. Use variances to evaluate managers performance.
Standard Costs
1. Standard costs are predetermined costs that are developed from analyses of both:
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In a standard costing system, standard costs for direct materials, direct labor, and manufacturing overhead flow through the inventory accounts and eventually into the Cost of Goods Sold account.
In the planning stage of the management cycle, standard costs aid in the development of budgets.
During the executing stage, standard costs, quantities, and time are applied to work performed.
During the reviewing stage, actual costs are compared with standard costs to compute variances, and managers analyze the causes of those variances to improve operations. During the reporting stage, a variance report provides information on operations and managerial performance
(C) Ghanendra Fago (M. Phil, MBA) 3
Standard Costs
Standard costs are used with existing job order or process costing systems. Standard costs are usually expressed as the cost per unit of a finished product or process. Standard costs are based on: Engineering estimates. Forecasted demand. Worker input.
Standard Costing
The technique for application of standard cost is known as Standard Costing. It is the preparation of standard cost and applying them to measure the variation between standard cost and actual cost. The preparation of standard costs of products and service and a technique whereby the planned activities of an undertaking are expressed in budgets, standard costs, standard selling price and standard profit margins, and the differences between these and the comparable actual results are accounted for. Standard costing is expensive to use because the management accounting system must keep separate records of actual costs to compare with what should have been spent.
(C) Ghanendra Fago (M. Phil, MBA) 6
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Standard Direct Materials, Standard Direct Labor Costs Manufacturing Overhead Costs
Standard Direct Materials Cost = Direct Materials Price Standard X Direct Materials Quantity Standard Standard Direct Labor Cost = Direct Labor Time Standard X Direct Labor Rate Standard Standard Manufacturing Overhead Cost = (Standard Variable Overhead Rate +Standard Fixed Overhead Rate) X Application Basis
(C) Ghanendra Fago (M. Phil, MBA) 12
Standard Rates
Standard Variable Manufacturing Overhead Rate = Total budgeted variable manufacturing overhead costs Expected number of standard machine hours Standard Fixed Manufacturing Overhead Rate = Total budgeted fixed manufacturing overhead costs Normal capacity in terms of standard machine hours
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No
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The purchase of substitute direct materials that differ from product specifications.
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Formula:
Material Usage Variance (MUV) = SP*(SQ-AQ)
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Formula:
Material yield variance (MYV): (Actual yield or outputStandard yield or output for actual input)*Standard cost per unit = SC/SO (Actual Yield standard Yield)
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VERIFICATION
Material Cost Variance (MCV)
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It is usually caused due to increases in wage rate because of negotiation with the union or other causes.
Labour Rate Variance = AT (SR AR)
Variance
An unfavorable direct labor efficiency variance can be caused by machine breakdowns, inferior direct materials, poor supervision, slow materials handling, and poor employee
performance
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VERIFICATION
Labour Cost Variance (LCV)
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