• Comments on Copeland
• Wellesley Paint Co. Case
• On measuring capacity
• Standards for Toledo Tool
W. Bentz EMBA 802 1

“That which is established by authority, custom, or general consent, as a model or example; criterion; test; in general, a definite level, degree, material, character, quality, or the like, viewed as that which is proper and adequate for a given purpose.”
W. Bentz EMBA 802 2

“In business, a carefully thought-out method of performing a task, a carefully drawn specification covering material or equipment.”
Webster’s New International Dictionary
W. Bentz EMBA 802 3

These dictionary definitions are quite consistent with the salient features of a standard costing system. An important point is to remember that costing systems exist within a management structure, not as independent entities.
W. Bentz EMBA 802 4

Standard costs reflect a comprehensive plan of managing in which studies are used to predetermine the desired magnitude of every expense, performance is compared with these standards, and attention is focused on variances. For simplicity and clarity, performance is expressed in dollars.
W. Bentz EMBA 802 5

Operate
By identifying important variances from plan--sliced & diced--one can zero in on significant variances.
W. Bentz EMBA 802 6

• In developing standard cost systems, the objective is to determine what should be the material, labor and support activity costs of activities, operations, products, and services.
The process begins with activity costs.
W. Bentz EMBA 802 7

The major uses of standard costs include:
– Information for decision-making
– Control of costs
– Performance measurement
– Projection of financial consequences
W. Bentz EMBA 802 8

• C-V-P analysis
• Product-mix and special-order decisions
• Pricing and bidding are facilitated by the availability of a file of contemporary standards from which estimates can be developed
• Outsourcing decisions
W. Bentz EMBA 802 9

• Standard cost represent desired levels of cost per unit of activity, product or service at the level of operations.
• Standard costs communicate cost targets for people to use as reference points in their efforts to control costs.
W. Bentz EMBA 802 10

• Cost reduction arises from changes in the product, inputs, production processes, or support activities that lead to a reduction in the costs expected. A new cost level is achieved because the cost environment has improved.
W. Bentz EMBA 802 11

Cost control, on the other hand, takes place within a production context as it now exists. The objective is to achieve the level of efficiency and cost that is inherent in current operations, inputs, etc.
Control means achievement of plan.
W. Bentz EMBA 802 12

• Price and quantity standards represent plans concerning desired cost efficiency under specified conditions.
• As plans, standards define and communicate to associates the performance expected.
W. Bentz EMBA 802 13

• Standards serve as benchmarks for use in evaluating relative performance in terms of both efficiency and productivity.
• Standards help decompose any differences between actual and standard cost by entity, product, activity, territory, market, or responsible party.
W. Bentz EMBA 802 14

• Standard costs facilitate the decomposition of differences between actual and planned costs by nature of the effect: price, quantity, yield, or mix.
15 W. Bentz EMBA 802

The cost information reflected in standards is useful for
– Pro-forma financial statements
– Cost budgets
– Cash budgets
– Purchase budgets
– Integrated profit plans
W. Bentz EMBA 802 16

Standard cost systems can be an integral component of the financial accounting structure, or they can be
“off-line,” and independent of the formal account structure. Modern enterprise systems integrate costing systems to better facilitate the full range of benefits of having standards.
W. Bentz EMBA 802 17

• Predetermined standard costs are set for each item of expense for each activity
• Materials and labor are charged to production at standard cost
• Work-in-process and Finished Goods are priced at standard cost
W. Bentz EMBA 802 18

• Variances of actual cost from standard cost are recorded for each element of expense by activity
• Costs can be tracked by cost centers
(responsibility centers)
• Costs can be monitored by expense category, i.e. direct labor
• Costs can be monitored by activity or activity type
W. Bentz EMBA 802 19

Expense Analysis Report
For the Period Ending mm/dd/yy
Cost Center 450
451
Activity No.
452 453
Subaccou nt No.
100
300
500
550
600
700
Expense
Item No.
Total
100
310
316
510
511
551
552
610
612
613
711
714
717
Total
Std. hours earned
W. Bentz EMBA 802
454 455
20

Fictional Enterprises, inc.
Expense Statement
For the Period Ending mm/dd/yy
Subacct.
No.
Description
100 Direct Labor
300 Materials Handling
500 Inspection Labor
550 Maintenance Supplies
600 Equipment Operation
700 Space Costs
Total Cost
Total Std. Hrs. Earned
Cost Center Number
Total 410 420 430 440 450 460 470 480 490
W. Bentz EMBA 802 21

• Company costs  factory costs  cost center costs  activity costs  activity cost elements  transactions
• Company variances  factory variances  cost center variances  activity variances  activity cost element variances
W. Bentz EMBA 802 22

• Reporting variances in dollars is a way to determine the relative importance of diverse variances, and to combine the variances by activity, product, responsible manager, or performance entity. Adding the effects of physical measures would be nonsensical.
W. Bentz EMBA 802 23

• Normal costing refers to the allocation of support costs to production activities based on the level of driver activity volume that is forecast for one or more fiscal years.
W. Bentz EMBA 802 24

• Represents an attempt to determine the basic cost of making products, excluding seasonal and other transitory effects on cost or volume.
W. Bentz EMBA 802 25

• A key issue is to isolate the effect of volume changes on unit costs when costs are in line with budget, but volumes differ from projections.
This discussion focuses on the volume issues, not cost issues.
W. Bentz EMBA 802 26

• Normal activity cost rate =
Cost of providing capacity
A measure of activity level
• Issues to resolve:
– What measure of capacity
– The costs to be included in the
“regular” cost of providing capacity.
W. Bentz EMBA 802 27

• The issues is to decide the desired level of capacity at which one would consider the level of capacity that must be provided for the production of goods and services with uncertain demand.
W. Bentz EMBA 802 28

• Even if the committed resources in the form of facilities and skilled personnel are known for the period, we still have some choices. We still must decide what level of facility utilization to use to calculate support activity rates.
W. Bentz EMBA 802 29

• Errors in predicting demand
• Long lead times that make forecasting difficult
• Regulation and capacity regulation
(hospitals)
• Actions of competitors
W. Bentz EMBA 802 30

W. Bentz EMBA 802 31