Week 7 Discussion Discuss standard costs and when it is efficient to use standard costs? Reply this 1st post: Standard Costs Standard costs are projections of actual costs in a firms manufacturing process as actual costs cannot be identified in advance. To obtain a standard cost, the summation of direct materials, manufacturing overheads, and direct labor are necessary (Drury, 2013). Standard costing is the accounting system used to identify the variances between standard and actual costing. Standard costs are beneficial to a firm as it can assign value to its inventory by multiplying the actual stock by the standard cost of each item. Similarly, it is useful in product pricing as budgets furnish information on expected expenses incurred by the business. Such information guides management on the amount to charge to obtain target profit (Collis, 2016). Standard costs assume there are no fluctuations in prices and, as such, allow financial costs to be produced more accessible and faster. The main disadvantages are that it only focuses on unfavorable variances and does not provide enough information to distinguish product units. Standard costs are useful, especially in the manufacturing industry, for budgeting for the upcoming year. Standard costs are vital in the analysis of variances and cost control as they are compared against the actual costs with variations caused changes in material and labor costs as well as manufacturing overheads (The Role of Standard Costs in Management | Managerial Accounting, n.d.). It explains the management by exception method. For instance, unfavorable variance calls for management action in guiding the firm to achieve the cost element of its profit objective. Unfavorable difference occurs when the actual costs are more than the ideal costs. A favorable budget difference is when actual expenses do not exceed typical costs and do not require management action. Notably, in developing standards, assumed conditions for meeting the standards is considerable. There are ideal and practical standards. Perfect standards form the best manufacturing circumstances where workers are highly efficient and skilled and with no machinery problems (Collis, 2016). Reasonable standards are strict but attainable requirements with allowances for machinery issues and workers rest periods. References Collis, J. (2016). Management accounting. Drury, C. M. (2013). Management and cost accounting. Springer. The Role of Standard Costs in Management | Managerial Accounting. Retrieved 17 August 2020, from ———————————————————————————————————————————— Reply second post: Standard costs set standards for measuring the performance of specific tasks completion; standards are set both for quantity and costs needed to produce goods or services (Noreen, 2020). Cost standards indicate what the cost per unit should be. Standard costs can be analyzed by the services we provide in retail sales, by examining quota attainment and sales based on hourly wages; the cost to achieve one sale with a variance if it takes less or more time over the duration of a set time period. Noreen, (2020), outlines several key advantages to standard costs; for management and leadership, this analysis allows management to focus on outside factors as long as costs conform to standards. They also provide benchmarks for both efficiency and performance- this is especially appropriate when dealing with sales and quota targets and attainment. This also simplifies bookkeeping as standard costs for materials, labor, and overhead can be charged to jobs. There are also restrictions and pitfalls to be aware of standard costs. One issue that I experience is using standard costs to assign blame or punish subordinates, as opposed to examining processes that may be negatively impacting the process. In sales, that means using standard costs variances negatively may lead to unethical sales practices to cover up or hide unfavorable cost vs profit reporting. Noreen, E.W., Brewer, P.C. & Garrison, R.H. (2020). Managerial Accounting for Managers. 5th edition. McGraw-Hill + e-book + Connect + Learn ISBN: 978-1260480771
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