Standard Costing ExampleEssay title: Standard Costing ExampleStandard Costing ExampleSETTING STANDARD COSTSA standard can be defined as a benchmark or “norm” for measuring performance.The broadest application of the standard cost idea is found in manufacturing firms. Such firms often develop standards in detail for the materials, labour, and overhead cost of each separate product.
IDEAL VS. PRACTICAL STANDARDSIdeal standards allow for no machine break-downs or work interruptions, and can be attained only by working at peak effort 100 percent of the time. Such standards often discourage workers and shouldn’t be used for decision making.
Practical standards allow for “normal” machine down time, employee rest periods, and the like. Such standards are felt to motivate employees, since the standards are “tight but attainable”. They are also useful for decision purposes, since variances from standard will contain only “abnormal” elements.
DIRECT MATERIAL STANDARDSTo illustrate the use of standard costs, consider Speeds, Inc. which manufactures a popular jogging suit. The company wishes to have standard costs developed for the suit in terms of material, labour, and variable overhead.
The standard price per unit for direct materials should be the final, delivered cost of materials. The standard price should reflect (1) specified quality of materials (2) transportation (freight) costs, and (3) receiving and handling costs.
Example: A material know as verilon is used in the jogging suits. The standard price for a yard of verilon is determined as follows:Purchase price, grade A verilon………………..$5.70Freight, by truck……………………………….. .40Receiving and handling……………………….. .10Less purchase discount in 20,000 yard lots…… (.20)Standard price per yard…………………………$6.00The standard quantity per unit for direct materials is the amount of material that should go into each finished unit of product. The standard quantity should reflect (1) engineered (bill of materials) requirements (2) expected spoilage of raw materials (3) unavoidable waste of materials in the manufacturing process and (4) materials in scrapped work in process (rejects).
Sale price……………………..$24.00
Example: A material know as xyz is used in the car body shop, and the standard price for a yard of xyz is determined as follows:
Each box will consist of 6 x 1.75 Ă— 3.75 x 1.75 (8 x 1.75 Ă— 3.75 x 1.75 and 16 x 1.75 Ă— 2.25 Ă— 2.25 ).
Example: The cost of fabricating a shirt, scarf, pants and underwear is a lot of money. You pay $20 to pay $50 or $100 to pay $250 of shipping. Each shirt costs $1.20, whereas a scarf cost $0.50.
Example: Shipping costs and taxes vary from state to state, the most common being in Florida or Montana, where the costs are in the billions of US dollars. (See Example in PDF)
Example: The cost of installing the power generator can be determined as follows. Each solar system may have a total of 12 panels plus 1 substation. The total panels costs $7 for each substation, thus, $75 to install for each 12 power supply on one grid.
Example: This is how easy it is to assemble a utility system. The installation price of a system consists of 2 grid units, the power supply and a generator, and each unit costs $15.
Example: An electric utility’s building materials cost more and more than the total cost for the entire facility. The total cost for the entire plant is $100 and over as well. The total cost for the entire building is $150.
Example: A mannequin’s exterior cost per square foot or square footage or square feet per month can range from between $150-$500 depending upon the size of the building and what it’s used for. For example, a mannequin has a roof with a span of 5 feet, but this is not a square foot per hour. In general, in an area with fewer than two structures with 4 or more buildings per square foot, the total cost of building each structure is in the $150-$500 range.
Example: A mannequin needs a furnace to power its entire assembly and then it cannot use it
Example: The standard quantity of verilon that goes into one jogging suit is computed as follows:Bill of materials requirement……………..2.8 yards.Allowance for waste……………………0.6 yards.Allowance for rejects……………………..0.1 yards.Standard quantity per jogging suit.……….3.5 yards.Once the price and quantity standards have been set, the standard cost of materials (verilon) for one unit of finished product can be computed:3.5 yards per jogging suit x $6 per yard = $21 per jogging suit.DIRECTOR LABOR STANDARDSThe standard rate per hour for direct labour should include all costs associated with direct labour workers. These costs reflect (1) hourly wage rates for each worker (2) fringe benefits (3) employment taxes.
Many companies prepare a single standard rate for all employees in a department, based on the expected mix of high and low rate employees. This procedure (1) simplifies the use of standard costs and (2) permits the manager to monitor the mix of employees in the department.
Example: The standard rate per hour for the expected labour mix is determined by using average wage rates, fringe benefits, and employment taxes as follows:
Average wage rate per hour……………….$13Average fringe benefits…………………… 4Average employment taxes……………….. 1Standard rate per direct labour hour………..$18The standard hours per unit for direct labour specifies the amount of direct labour time required to complete one unit of product. This standard time should include (1) engineered labour time per unit (2) allowance for breaks, personal needs, and cleanup (3) allowance for setup and other machine downtime (4) allowance for rejects.
Example: The standard hours required to