Prepared by Diane Tanner University of North Florida

Chapter 7 Standard Costs Prepared by Diane Tanner University of North Florida

What is a standard cost? The unit ‘cost’ that management believes should be incurred to produce a good or service under anticipated conditions Primary benefit Allows for comparison of standard versus actual costs Functions as a benchmark Differences are flagged for investigation if significant Standard Costs

Terminology Standard cost Standard cost of a single unit Budgeted cost Cost, at standard, of a single unit or the total number of budgeted units Standard Costs and Budgets

Formulas or recipes Price lists provided by suppliers Time and motion studies conducted by industrial engineers Union contracts Analyses of past data Insight from management Expected economic changes How are Standard Costs Developed?

Two views when developing standard costs: Ideal standards Assumption that no obstacles to the production process will be encountered Called ‘perfection’ standards Attainable Standards Assumption that there will be occasional problems in the production process Such as equipment failure, labor turnover, and materials defects Ideal Versus Attainable Standards

Standard Costs Put your P's and Q's into place.... Standard Price is the budgeted price of the material (per RM unit), labor (per hour), and overhead for each unit of product P Standard Quantity is the budgeted quantity of material (in RM quantities), labor (in hours), and overhead in a product Q

Variances are not a clear sign of good or bad performance Indicate a potential problem Must be investigated if material in amount Management by exception Many reasonable explanations Investigation of Standard Cost Variances

The End

Prepared by Diane Tanner University of North Florida