A&MIS 525 1

Session 21

Standard Costing

Monday, April 29, 2002

A&MIS 525 2

• 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

Today’s Quote

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

4 A&MIS 525

OutputsInputs

Basic Activity View

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.

8 A&MIS 525

Just in

time

Basic Activity View

INPUTS

Outputs

Input/Output

A&MIS 525 9

Input/Output Relationships

INPUTS OUTPUTS

Yield or Productivity

Efficiency

10 A&MIS 525

Basic Activity View

Outputs

INPUTS

Input/Output

Utilization

Rates

Productivity

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,1. AQU × ap = sp × SQ + (ap–sp)AQU +

(AQU - SQ)sp

2. AQU × ap = sp × SQ + ap × AQU – sp × AQU + AQU × sp - sp × SQ

3. 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.