STANDARD COSTING IN A MANUFACTURING FIRM

Allama Iqbal Open University

Shahid Mahmood Awan

MBA (HRM) 2nd

Semester(2010-2012)

AgendaIntroduction

Standards Should Be Set At A Realistic

Level

Identify Unfavorable Variances

Introduction to the issue

Data collection methods

Swot Analysis

Conclusion & Recommendations

Standard Costing: Standard costs are usually associated with a

manufacturing company's costs of direct

material, direct labor, and manufacturing overhead.

Standards may be set by engineers, production

managers, purchasing managers, and personnel

administrators.

Standards may be established through test runs or

mathematical and technological analysis. Standards are

based on the particular situation being appraised

Standards should be set at a realistic level.

Those affected by the standards should participate in formalizing them so there will be internalization of goals.

Standards that are too loose will result in inefficient operations.

If employees receive bonuses for exceeding normal standards, the standards may be even more effective as motivation tools.

is usually is complicated by the problem of

computing the number of equivalent units of

production

Variances may be controllable, partly controllable, or

uncontrollable.

The extent to which a variance is controllable depends on

the nature of the standard

A standard cost system establishes a predetermined

figure that companies expect will represent actual

production costs.

Variance Analysis

Identify Unfavourable Variances Standard costing techniques help a company

measure material and labor variances. For example,

the company may expect to produce 1,000 units with standard material costs of $5 and standard labor costs of $9 per unit. Actual production costs, however, are $5.75 for materials and $9.50 for labor costs, resulting in unfavourable variances of 75 cents and 50 cents, respectively. The variances help companies focus on specific areas for implementing corrective measures to improve operating costs.

The Need for Standards: Standards Are common in business Are often imposed by government

agencies (and called regulations) Standard costs Are predetermined unit costs Used as measures of performance

Process of Standard Costing:

Distinguish between a standard and a budget. Identify the advantages of standard costs. Describe how standards are set. Discuss the reporting of variances. Make conclusion

The Setting of Standarda. A managerial accounting decision. b. A management decision c. A worker decision. d. Preferably set at the ideal level of

performance

Advantages of standard Costing

Facilitate management planning Promote greater economy by making employees

more “ cost- conscious” Useful in setting selling pricesContribute to management control by providing

basis for evaluation of cost control Useful in highlighting variances in management

by exceptionsSimply costing of inventories and reduce costs

Disadvantages of Standard CostinngThe use of standard costs can present a

number of potential problems or disadvantages.

Standard cost variance reports are usually prepared on a monthly basis and often are released days or even weeks after the end of the month.

If managers are insensitive and use variance reports as a club, morale may suffer. Employees should receive positive reinforcement for work well done.

Standard Cost and Estimated Cost

Both the standard costs and estimated costs are used to determine price in advance. The purpose of both the system is to control cost.

Estimated costs are based on historical accounting. It is an estimate of what the cost will be. It is a cost of guess work or reasonable estimate for the costs in future.

Estimated costs cannot be used to determine efficiency.

DollarDollar is the leading writing instruments and

stationery manufacturer in Asia, with exports to more than 50 countries in all five continents.

Established more then half a century

Dollar of stationery has attained the status of a heritage brand and a household name in Pakistan

PRODUCTSMARKERSWhite Board MarkersHi-lightersFIBER TIP PENSFOUNTAIN PENSBALL PENSInkGlue stickStaples

SWOT Analysis Strengths Experienced, broad base of interests and knowledge Differentiated, Variation in products Diverse, and local awareness & Very

experienced, high knowledge High sales revenue, high sale growth, large

capital base Continuous efforts to research trends an

reinforce creativity

SWOT Analysis WeaknessesLarge size may lead to conflicting

interestsSo much product lines but still not able to

knock out in Ink. High expenses, may have trouble

balancing cash-flows of such a large operation

SWOT Analysis Opportunities Distinctive name, product and packaging in

with regards to its markets Increase in the population Maintenance of proper website which

subscribes and provides information regarding long production line.

SWOT Analysis Threats Illiterate people go for loose stationary

product which is substandard as well Intense competition can pay so they have to

keep eyes openCompetitors are global leaders so they have

more technology as compared to PARKER PEN

Standard Costing In DollarAid in inventory costingAssist in decision makingSell price formulation based on what costs

should beHighlight problem areas through the

“management by exception” principleMotivate employees to accomplish

predetermined goalsAssist in planning by forecasting needs (e.g.,

cash requirements)

Standard Costing In DollarDate Account Name Debit Credit

Jan. 8, 2010 Direct Materials Inventory

3,000

Accounts Payable 2,900Direct Materials Price Variance 100

Standard Costing In manufactures JeansStandard Actual Actual denim manufactured

Standard for Manufacturing each Unit

Total standard material for the actual manufactured—Total Amount of material that should have been usedto make the good output

Standard cost per Unit 3.00

Standard cost of units in the goodoutput—the jeans actually produced 960.00 1014.00

390.00

2.44

160.00

2.60

1014.00

160.00

2.00

320.00

3.00

960.00

Standard Actual Variance Variance RS

320.00 3 90.00 - 70.00 - 2 10.00 (adverse)

3.00 2.60 0.40 156.00(favourable)

- 5 4.00

ConclusionA standard cost is a predetermined cost of

manufacturing, servicing, or marketing an item during a given future period.

It is based on current and projected future conditions

The norm is also dependent on quantitative and qualitative measurements

Standards may be based on engineering studies looking at time and motion.

The formulated standard must be accurate and useful for control purposes.

RecommendationsLabor quantity standards and efficiency

variances make two important assumptions.First, they assume that the production process

is labor-paced; if labor works faster, output will go up.

Second, the computations assume that labor is a variable cost.

Just meeting standards may not be sufficient; continual improvement may be necessary to survive in the current competitive environment.

Questions, Answers and Comments?

T h a n k s !

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