STRATEGIC COST MANAGEMENT
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Standard Costs
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Represent the planned cost of a
production and are generally
established well before production
begins
Provide management with goals to attain
and basis for comparison with actual
results
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Are those expected to be achieved in a
particular production process under
normal conditions
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Concerned with cost per unit and serves
basically the same purpose with budget.
Budget, however are management
expectations in terms of total cost rather
than in terms of per unit cost.
Purpose of standard cost accounting
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Is to control costs and promote
efficiency. Standard cost may be used
for:
o Cost control
o Pricing decisions
o Performance appraisal
o Cost awareness
o Management by objectives
Cost Control
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Refers to identifying a cost with its
related benefits and making sure that
the cost is justified given the benefits
derived
Standard cost provide a very useful tool
for cost control
Pricing Decisions
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Prices are established to cover the cost
of a product and at the same time
provide profit.
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Standard cost provide a measure of
consistency by eliminating fluctuations
in actual costs.
Performance Appraisal
Provide measurements that can be
applied uniformly to all personnel being
evaluated.
Cost Awareness
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Standard cost performance reports
inform managers of the cost
implications to make them take steps to
effectively control cost.
Management By Objectives
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A standard cost system facilitates MBO
because it provides a quick reference
for identifying and reporting differences
between standard and actual
performance
ESTABLISHEMENT OF STANDARDS
An integral part of any standard cost system is
the setting of standards for direct materials,
direct labor, and factory overhead.
Direct Materials Standards
1.
Direct materials price standards
Price standards are the unit price at
which direct materials should be purchased.
The cost accounting department and/or
purchasing department are normally responsible
for setting the direct material price standards
since they have ready access to price data and
should have knowledge of market conditions and
other relevant factors.
The purchasing department is responsible for
canvassing suppliers to determine which
supplier will give the best price at the desired
quality level and within the constrain of delivery
and other requirements.
2.
Direct materials usage (efficiency)
standards
Efficiency (quantity or usage) standards are
predetermined specifications of the quantity of
direct materials that should go into the
production of one finished unit.
The engineering department should set the
standard because it designs the production
process is in the best position to set realistically
attainable material standards.
Direct Labor Standards
1.
Direct labor price standards
Price (rate) standards are predetermined rates
for a period. The standard rate of pay that an
individual will receive is usually based on the
type of job being performed and the experiencing
that the person had on the job. The wage rate of
most manufacturing companies is usually set
forth in the union contract.
2.
Direct labor efficiency standards
Efficiency standards are predetermined
performance standards for the amount of direct
labor hours that should go into the production of
one finished unit.
The amount of direct labor hours required to
produce on unit will usually decrease as workers
become more familiar with the process. The
effect of the learning process on workers may be
visually shown in what is technically called the
learning curve.
Factory Overhead Standards
The individual cost that make up total factory
overhead are effected differently by increase or
decrease in plant activity.
When determining a standard product cost, the
amount representing factory overhead cost is
separated into variable cost and fixed cost.
Total variable factory overhead cost will vary in
direct proportion with the production level, while
variable factory overhead per unit will remain
constant with in relevant range.
Total fixed overhead cost will remain constant
over different activity levels, while fixed overhead
cost per unit will decrease as production
increase.