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Prepared byDiane TannerUniversity of North Florida

Standard Costs

Chapter 7

Standard Costs

What is a standard cost? The unit ‘cost’ that management

believes should be incurred to produce a good or service under anticipated conditions

Primary benefit Allows for comparison of standard

versus actual costs Functions as a benchmark Differences are flagged for investigation

if significant

Standard Costs and Budgets

TerminologyStandard cost

Standard cost of a single unitBudgeted cost

Cost, at standard, of a single unit or the total number of budgeted units

How are Standard Costs Developed?

Formulas or recipes Price lists provided by suppliers Time and motion studies conducted by

industrial engineers Union contracts Analyses of past data Insight from management Expected economic changes

Ideal Versus Attainable Standards

Two views when developing standard costs:Ideal standards

Assumption that no obstacles to the production process will be encountered

Called ‘perfection’ standards

Attainable Standards Assumption that there will be occasional

problems in the production process Such as equipment failure, labor turnover,

and materials defects

Standard Costs

Standard Price is the budgeted price of the material (per RM unit), labor (per hour), and overhead for each unit of product

Standard Quantity is the budgeted quantity of material (in RM quantities), labor (in hours), and overhead in a product

Investigation of Standard Cost Variances

Variances are not a clear sign of good or bad performance

Indicate a potential problem Must be investigated if material in amount

Management by exception Many reasonable explanations

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The End