Standard Cost and Operating Performance Measures

Standard cost- Management by Exception: A standard is a benchmark or norm for measuring performance. Standards are widely used in managerial accounting where they relate to the quantity and the cost of inputs used in manufacturing goods and providing services. Quantity and price standards are set for each major input such as raw materials and labor time. Quantity standards specify how much of an input should be used to make a product or to provide a service. Price standard specify how much should be paid for each unit of input.

If either the quantity or the cost of inputs departs significantly from the standards managers investigate the discrepancy to find the cause of the problem and eliminate it. !his process is called Management by Exception. A standard cost card shows the standard quantities and costs of the inputs required to produce a unit of a specific product. Standards are two types" #$ Ideal standards. %$ Practical standards. Ideal standards can be attained under the best circumstances. Practical standards are &tight but attainable'.

(ariance from practical standards typically signals a need for management attention because they represent deviations that fall outside of normal operating conditions. Setting direct material standards) Purchase price -reight cost 0ess) Purchase discount Standard price per unit ..%/ 1...2$ /... *.+,

!he standard quantity per unit for direct materials should reflect the amount of material required for each unit of finished product as well as an allowance for unavoidable waste. 3aterials required as specified in the bills of material Allowance for waste and spoilage Allowance for reject Standard quantity per unit Setting direct labor standard: !he standard rate per hour for direct labor includes wages employment ta5es and fringe benefits. Setting variable manufacturing overhead: It is e5pressed in terms of rate and hour. Materials price and quantity variance: A price variance is the difference between the actual price of an input and its standard price multiplied by the actual amount of the input purchased. A quantity variance is the difference between how much of an input was actually used and how much should have been used and is stated in dollar terms using the standard price of the input. AQ6AP Price variance Direct material variance: 7,.. pounds8 Actual Quantity 9*.+8 Actual cost Standard quantity 8 7... Standard cost8 9/ AQ6AP 7,.. pounds 69*.+ per pound 9%/4.. SP6AQ 7,..69/ :%7... 7...6/ %/... SQ6SP SP6AQ SQ6SP Quantity variance %.4 ..% ..# *..

Price variance #*..-

Quantity variance 9%...;

!otal (ariance 4..; Production manager is held responsible for quantity variance.

Direct labor variance: A<6A= =ate variance A<6S= S=6S< >fficiency variance

0abor rate variance8 Price for direct labor production supervisors are responsible for labor rate variance. VMO : Same Delivery cycle time: !he amount of time from when a customer order is received to when the complete order is shipped is called delivery cycle time. !hroughput time: !he amount of time required to turn raw materials into completed products is called throughput time or manufacturing cycle time.