Session 21
Standard Costing
Monday, April 29, 2002
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Today’s Quote
• 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
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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
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Basic Activity View
Inputs
Outputs
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Related Terminology
 What does it mean to be efficient?
 What does it mean to be effective?
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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.
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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.
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Basic Activity View
INPUTS
Just
in
time
Outputs
Input/Output
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Input/Output Relationships
Yield or Productivity
INPUTS
OUTPUTS
Efficiency
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Basic Activity View
Utilization
Productivity
Rates
INPUTS
Outputs
Input/Output
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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.
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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.
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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.
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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.
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Usage Sequence
 Study and analysis of production
processes and equipment
specifications
 Work with employees regarding
purpose, setting of, and use of
standards
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Usage Sequence - 2
 Development of the unit standards
 Materials
 Labor
 Cost driver one
 Cost driver two
 Cost driver three, etc.
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Usage Sequence - 3
 Development of accounts, subsidiary
records and reports to be used.
 Implementation of the software
required
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Cost & Variance Relationships
Standard cost
+ Unfavorable variances
- Favorable variances
= Cost incurred (GAAP)
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Relationship Overview - dr/cr
Standard cost (dr)
+ Unfavorable variances (dr)
- Favorable variances (cr)
= (Actual) cost incurred (dr)
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Formulae
 The total input at standard for the
output achieved = output × per
unit standard
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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
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Formulae
 Standard cost per unit = Σ(sq × sp)
 Standard cost of production =
AQO × Σ(sq × sp)
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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
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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.
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