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Cost Accounting Test 4

Terms in this set (16)

Standard Cost
A standard cost is the predetermined cost of manufacturing a single unit or a specific quantity of product during a specific period.

It is the planned cost of a product under current or anticipated operating conditions.
A standard cost has 2 components:
1) A physical standard
-which is a standard quantity of inputs per
unit of output

2) A price standard
-which is a standard cost or rate per unit
of input
A standard is like a norm.
A standard should be thought of as a norm for production inputs, such as units of materials, hours of labor, percentage of capacity used.
Usefulness of Standard Costs
A standard cost system can be used in connection with either process or job order costing.

Standard costs aid in planning and controlling operations.
Standard Costs are used for:
1. Establishing budgets

2. Controlling cost by motivating employees and measuring operating efficiencies.

3. Simplifying costing procedures and
expediting cost reports.

4. Assigning costs to materials, work in
process, and finished goods inventories.

5. Establishing contract bids and setting sales
prices.
Standards are useful in preparing budgets.
With standard costs, budgets for any volume and mix of products are more reliably and quickly prepared.

Reliability is enhanced → standards are based on analyses of the production processes.

Preparation time is reduced → production requirements are documented in the standards for each product.
Standard costs simplify costing by reducing clerical labor.
A complete standard cost system usually is accompanied by standardization of production.

As the production process becomes more standardized, clerical effort declines.

Incorporating standard costs into accounting records increases efficiency and accuracy in clerical work.
Inventories at Standard Cost
Inventory costs are easily determined by multiplying the quantities of each product in inventory by the standard unit cost and then adding the total cost for each product.
Setting Standards
Calculating a standard cost requires physical standards.
2 Types of Physical Standards:
Basic & Current

A Basic Standard:
is a yardstick against which both expected and actual performances are compared.

Current Standards:
are of three types:
1. An expected actual standard
2. A normal standard
3. A theoretical standard
Expected Actual Standard
An expected actual standard reflects the expected level of activity and efficiency.

It is a reasonably close estimate of actual results.
Normal Standard
A normal standard reflects the expected level of activity and efficiency.

It represents challenging yet attainable results.
Theoretical Standard
A theoretical standard reflects an ideal or maximum level of activity and efficiency.

It is a goal to be aimed for rather than a currently achievable performance.
Material & Labor Standards
generally are based on normal, current conditions, allowing for expected changes in prices and rates and reflecting desired efficiency.
Overhead Standards
usually are based on normal operating conditions, normal volume, and desired efficiency.
Success of a Standard Cost System
depends on the reliability, accuracy, and acceptance of the standards.
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