Standard Cost

Chapter 10 Lecture Notes

Standard Costs and Operational Performance Measures

A Word on Flexible Budgets (from chapter 9: pages 384 - 388)

Planning Budget—prepared before the period begins (Chapter 8)

Flexible Budget—takes into account how changes in activity affect budgeted revenue and budgeted costs.

STANDARD

A standard is a benchmark used for measuring performance.

-quantity of input

-cost of inputs

Management by Exception Exhibit 10-1 page 420

-standard cost performance report are prepared showing variances

-focus attention on variances to determine why they occurred

-take corrective action to eliminate variance

Setting Standards

-Ideal standards

1. No machine breakdowns or other interruptions;

2. Expect skilled and efficient employees to work at 100%;

3. Large variances are normal since standards are difficult to achieve making “management by exception” difficult;

4. Causes issues with worker motivation.

-Practical standards

1. Tight but attainable;

2. Allow for normal machine breakdown and employee rest periods;

3. Should be achievable with highly efficient efforts of average worker;

4. Variances focus “management by exception;”

5. Used to forecast cash flow and inventory purchases/production.

Standard cost card Exhibit 10-2 page 423

| |(1) Standard |(2) Standard |(1) x (2) |

|Input |Quantity or Hours |Price or Rate |Standard Cost |

|Direct materials |3.0 pounds |$4.00 |$12.00 |

|Direct labor |0.5 hours |$22.00 |$11.00 |

|Variable MOH |0.5 hours...