Illustration Of The Computation

Illustration Of The Computation The illustration of the computation of standard costs and variances will continue with the Bellow Corporation example. Recall that a static budget was developed for the company using an assumed level of sales of 24,000, whereas the actual level of sales achieved was 20,000 units. A standard cost system applies only to direct materials, direct labor, and factory overhead, not to selling and administrative expenses. The budget data for the Bellow Corporation, contained in Exhibit 17-5, are further analyzed for standard cost purposes in Exhibit 17-6. It is also assumed that the amount of direct materials purchased was equal to the amount of direct materials used during the month. Classes of Standards Recall that there are two general classes of standards. A standard that measures an amount of an input into a process is termed a quantity or usage standard. A standard that measures the cost of that input is termed a price or rate standard. Usage standards are employed by organizations to control the amount of direct material, direct labor, and factory overhead that is consumed in the production process. Rate standards are used to control the price paid for the factors of produc-tion. By dividing a standard for a given product into these two classes, management can more easily isolate the cause of a deviation from the standard. Direct Material Standards The development of direct material standards requires the evaluation of two separate and distinct factors: (1) the amount of direct material to be used to produce one unit of product and (2) the unit cost of the direct material. Direct material quantity standards are generally developed by one or a combination of the following procedures: 1. Engineering specifications that indicate the amount of direct material that should be used to manufacture one unit of the product. 2. Trial runs that indicate the amount of direct material used under controlled conditions. 3. Past performance that indicates the average amount of direct material used to produce one unit under actual conditions. These results can also be used in conjunction with the three types of performance standards previously discussed (ideal, normal, and currently attainable performance). Engineering specifications most closely resemble an ideal standard, trial run results are similar to normal standards, and standards set at past performance levels resemble currently attainable performance standards. It is also possible to set the direct material price standard in a variety of ways: 1. Current price standards indicating the expected cost of direct materials during the coming period. 2. Average price standards that are based on an average of past prices and statistical trends. 3. In long-term purchase contracts the standard is based on a contract with a supplier. The assignment of the responsibility to managers for meeting direct material standards is an additional issue. In most businesses many activities are subdivided, and different managers are assigned the responsibility for the performance of various tasks. The performance evaluation function in standard setting is most useful when a manager is held responsible only for those costs he or she can control. A task commonly separated from other functions is purchasing. When a purchasing manager is responsible for the acquisition of direct materials, the responsibility for maintaining the direct materials price standard should be assigned to the purchasing manager, not the production manager. The responsibility for the amount of direct materials actually used should be assigned to the production manager.