Sunday, August 2, 2015

Standard Cost Systems

A common scenario
Mike manages production facility for Amalgamated Widgets, Inc, Under him arefollowing departments: purchasing, production, warehousing&shipping, maintenance&security, Mike gets bonus each year, depending on how well he managesproduction facility, He also hasauthority to give bonuses to employees working under him when they meet exceed performance goals,
Mike,&his management team, use standard cost system, They have determinedquantities possible,&the cost components of their products,  under normal conditions, Costs are divided intofollowing categories: Direct Materials, Direct Labor&Factory Overhead, The factory incurs no Selling G&A (General&Administrative) expenses, All their costs relate to producing products,
A product's standard cost, îs what it should cost to makeproduct, Atstart of each month production budget îs prepared, using standard costs&estimated production quantities, Atend of each month variance report îs prepared to compareproduction budget withactual quantities&costs of production,
The variance report tells Mike&his managers how well they did at achieving their budget goals, A favorable variance shows that actual costs are less than budgeted (standard) costs, An unfavorable variance îs justopposite actual costs are greater than budgeted costs,
By using budgetmanagement team can estimate their future costs&cash needs, plan production, schedule employees, coordinate materials purchases, reduce waste, increase production efficiency&meet shipping deadlines, Variances helpmanagers identify specific areas where they came în either over under budget, They will try to repeat their successes&eliminate their failures, Each month they hope to become little more efficient,
The budgets will be used to evaluate Mike&his managers, Their annual bonuses will depend on how well they meet their budget goals, Managers who consistently produce unfavorable variances will probably be replaced, We ask few questions&answer them by using relevant variances, How well did management (managers) do:
buying&using materials to make products?scheduling employee time&motivating employees to be efficient?controlling factory overhead costs?Variances
Total Materials VarianceMaterials Price VarianceMaterials Quantity VarianceTotal Labor VarianceLabor Rate VarianceLabor Efficiency VarianceVariable Overhead VarianceFixed Overhead Variance
Variances&Standard Costs are entered intoaccounting records using journal entries, The use of standard costing systems greatly simplifies some accounting procedures, Standard costs are entered weekly monthly, Variances are calculated&entered, Monthly production&income reports are prepared, Managers use current information to prepare budgets forcoming months, 
actual costs standard costs^ difference = variance ^ $1200 $1250^ $50 favorable variance ^actual costs are less than standard = favorable variance By breakingtotal variance down into its component parts managers can pinpointcause ofvariance, Sometimes favorable variance în one area causes unfavorable variance în another area, Managers should be alert to these possibilities,
For instance, there might be favorable materials price variance, because lower cost materials were purchased, Ifmaterials were of inferior grade, there could be increase în waste, giving rise to unfavorable materials quantity variance, Additionally, more labor could be required to handle&deal withinferior materials, giving rise to unfavorable labor efficiency variance,
Don't be mislead by small total variance, This example shows large favorable&unfavorable variances offsetting each other, This îs not sign of efficient effective management, 
quantity variance $1000 favorableprice variance (950) unfavorabletotal variance $50 favorableChanges în CostsVariances can arise for large number of reasons:
errors în estimatingmis management of resourcesunforeseen price changesequipment breakdownlabor problemspoor planningshortage of raw materialsBudgeting&Variance accounting presume that managers should fix problems, not bury hide them, It also presumes that these problems are short term problems,&can be effectively controlled infuture,
Sometimes there îs change în actual costs that necessitates change în standard costs, For instance, new labor contract could increase total labor costs by predictable amount, Standard labor costs should be re calculated to reflectnew actual labor costs, Once new standard cost îs calculated, future variances will be correctly reflected inmonthly variance report, If standard costs are not updated periodically,monthly reports can show unrealistic favorable unfavorable variances,
The purpose of variances&budgeting îs to give management effective tool for controlling costs, Butsystem must be continually reviewed&kept up to date, This îs also important, because standard costs&variances are entered intobooks as journal entries, so they must be based on reliable underlying assumptions, These assumptions must passcritical eye ofcompany's certified auditors, so they must be current&accurate,x

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