After studying Chapter 8, you should be able to: Explain how direct materials standards and direct labor standards are set; compute the direct materials price and quantity variances and explain their significance; compute the direct labor rate and efficiency variances and explain their significance; compute the variable manufacturing overhead spending and efficiency variances. | Standard Costs Chapter8 Standard Costs Standard Costs are Predetermined. Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system. Standard Costs Direct Material Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Type of Product Cost Amount Direct Labor Manufacturing Overhead Standard Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Setting Standard Costs Setting Standard Costs Should we use practical standards or ideal standards? Engineer Managerial Accountant Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Production manager Setting Standard Costs I agree. Ideal standards, that are based on perfection, are unattainable and discourage most employees. Human Resources Manager Note The argument that ideal standards are discouraging has been persuasive for many years. So “normal” defects and waste were built into the standards. In recent years, TQM and other initiatives have sought to eliminate all defects and waste. Ideal standards, that allow for no waste, have become more popular. The emphasis is on improvement over time, not attaining the ideal standards right now. Setting Direct Material Standards Quantity Standards Use product design specifications. Price Standards Final, delivered cost of materials, net of discounts. Setting Direct Labor Standards Rate Standards Use wage surveys and labor contracts. Time Standards Use time and motion studies for each labor operation. Setting Variable Overhead Standards Rate Standards The rate is the variable portion of the predetermined overhead rate. Activity Standards The activity is the base used to calculate the predetermined overhead. Standard Cost Card – Variable Production Cost A standard cost card | Standard Costs Chapter8 Standard Costs Standard Costs are Predetermined. Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system. Standard Costs Direct Material Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Type of Product Cost Amount Direct Labor Manufacturing Overhead Standard Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations. Setting Standard Costs Setting Standard Costs Should we use practical standards or ideal standards? Engineer Managerial Accountant Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Production manager Setting Standard Costs I agree. Ideal standards, that are based on perfection, are unattainable and discourage most employees. .
