Costing Eg
Standard Costing Example
SETTING STANDARD COSTS
A standard can be defined as a benchmark or "norm" for measuring performance.
The broadest application of the standard cost idea is found in manufacturing firms. Such firms often develop standards in detail for the materials, labour, and overhead cost of each separate product.
IDEAL VS. PRACTICAL STANDARDS
Ideal standards allow for no machine break-downs or work interruptions, and can be attained only by working at peak effort 100 percent of the time. Such standards often discourage workers and shouldn't be used for decision making.
Practical standards allow for "normal" machine down time, employee rest periods, and the like. Such standards are felt to motivate employees, since the standards are "tight but attainable". They are also useful for decision purposes, since variances from standard will contain only "abnormal" elements.
DIRECT MATERIAL STANDARDS
To illustrate the use of standard costs, consider Speeds, Inc. which manufactures a popular jogging suit. The company wishes to have standard costs developed for the suit in terms of material, labour, and variable overhead.
The standard price per unit for direct materials should be the final, delivered cost of materials. The standard price should reflect (1) specified quality of materials (2) transportation (freight) costs, and (3) receiving and handling costs.
Example: A material know as verilon is used in the jogging suits. The standard price for a yard of verilon is determined as follows:
Purchase price, grade A verilon
..$5.70
Freight, by truck
.. .40
Receiving and handling
.. .10
Less purchase discount in 20,000 yard lots
(.20)
Standard price per yard
$6.00
The standard quantity per unit for direct materials is the amount of material that should go into each finished unit...
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