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Session 21

Session 21. Standard Costing Monday, April 29, 2002. Today’s Quote. Nothing in the world can take the place of PERSISTENCE . Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded it's almost a proverb.

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Session 21

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  1. Session 21 Standard Costing Monday, April 29, 2002 A&MIS 525

  2. Today’s Quote • Nothing in the world can take the place of PERSISTENCE. • Talent will not; nothing is more common than unsuccessful men with talent. • Genius will not; unrewarded it's almost a proverb. • Education will not; the world is filled with educated derelicts. • PERSISTENCE and DETERMINATION alone are omnipotent. _Calvin Coolidge A&MIS 525

  3. Agenda Today • Discuss standard costing • Remind ourselves about the efficiency & effectiveness distinction • Summarize the basics about the relationship of standards to the costs incurred • Review problems A&MIS 525

  4. Basic Activity View Inputs Outputs Activity A&MIS 525

  5. Related Terminology • What does it mean to be efficient? • What does it mean to be effective? A&MIS 525

  6. Efficiency • Measures of efficiency nearly always compare the inputs to an activity or process with its outputs. The greater the output per unit of input, the more efficient. The fewer the units of input required to make one unit of output, the greater the efficiency. • Efficiency is a general concept that relates to entities ranging from individuals performing a single task to entire economies. A&MIS 525

  7. Efficiency in Accounting • In accounting we use cost standards, flexible budgets and profitability measures to evaluate efficiency. These standards relate the work done to the cost incurred to achieve that work. Physical measures are useful, but the ultimate measures include profitability. A&MIS 525

  8. INPUTS Outputs Activity Input/Output Basic Activity View Just in time A&MIS 525

  9. Yield or Productivity INPUTS OUTPUTS Efficiency Input/Output Relationships A&MIS 525

  10. Basic Activity View Utilization Rates Productivity Activity INPUTS Outputs Input/Output A&MIS 525

  11. Operational (Technical) Control Provides feedback to employees and their managers about the efficiency of activities being performed. Measures of effectiveness might include cycle times, spoilage rates, lost units, late shipments, etc. A&MIS 525

  12. Standard Costing • A management system that makes sense in a technical planning and control context • Concerned with economic efficiency, not effectiveness beyond this one issue. A&MIS 525

  13. Roots • Originated as part of the scientific management movement of the early to mid 20th century. • Represents a move away from arbitrary management methods to those based on observable “scientific” information. This movement followed the successes of medicine and agriculture earlier in the 20th century. A&MIS 525

  14. Substance • Standards represent the output that should be achieved at a specified level of perfection based on the operating capacities of people, equipment, management, process design, etc. A&MIS 525

  15. Usage Sequence • Study and analysis of production processes and equipment specifications • Work with employees regarding purpose, setting of, and use of standards A&MIS 525

  16. Usage Sequence - 2 • Development of the unit standards • Materials • Labor • Cost driver one • Cost driver two • Cost driver three, etc. A&MIS 525

  17. Usage Sequence - 3 • Development of accounts, subsidiary records and reports to be used. • Implementation of the software required A&MIS 525

  18. Cost & Variance Relationships Standard cost + Unfavorable variances - Favorable variances = Cost incurred (GAAP) A&MIS 525

  19. Relationship Overview - dr/cr Standard cost (dr) + Unfavorable variances (dr) - Favorable variances (cr) = (Actual) cost incurred (dr) A&MIS 525

  20. Formulae • The total input at standard for the output achieved = output × per unit standard A&MIS 525

  21. Formulae • Materials, labor and driver activity: • SQ is the total material, labor or driver activity “allowed” at standard for a given level of output in equivalent units • SQ = Output (EU’s) × unit standard • SQ= AQO× sq A&MIS 525

  22. Formulae • Standard cost per unit = Σ(sq × sp) • Standard cost of production = AQO×Σ(sq × sp) A&MIS 525

  23. Formulae • When the price variance is isolated and recorded at usage, • AQU×ap = sp× SQ + (ap–sp)AQU + (AQU - SQ)sp • AQU×ap = sp × SQ+ap × AQU –sp × AQU+AQU × sp- sp × SQ • AQU×ap = AQU×ap A&MIS 525

  24. Formulae • When the price variance is isolated and recorded at purchase, the difference between actual cost and standard cost is partly reflected in the inventory account. A&MIS 525

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