Question

Your company uses a standard costing system, which bases its quantitative standards on historical experience. You are fortunate to be surrounded by a team of knowledgeable personnel in operations. In your first week on the job, you are asked to do the following tasks.

Q) You believe that your company should not develop its quantitative standards on historical experience. Explain why and suggest an alternative.

Q) Choose one of your company’s products. Suggest one ideal standard, and one currently attainable standard. Ensure that you include price, usage and cost in each standard.

note: for question two take any company's product as an example.

Answer 1

Q) You believe that your company should not develop its quantitative standards on historical experience. Explain why and suggest an alternative.

A) First of all, you should understand what is a quantitytative stadard. Quantitative standards are based on the quantitative decisions of a process, its more like the input output ratio. For example the hours of direct labour required to produce one brick is a quantitative decision. Now one should know what a historical experiance is, its basically the understanding we derive about anything based on the past records. So if historical experience is used to quantitative standard, the management will not factor in inefficiency. For example suppose initially it took 20 mins to produce one brick, but later with reccurrent work and growing learning curve, the labour is able to produce one brick in 10 mins, So this improvement which is normal in any production due to learning curve will not be factored in if the management follows historical experience. Engineering studies is an alternative solution for this. So that we can scientifically determine a quantitative standard.

Q) Choose one of your company’s products. Suggest one ideal standard, and one currently attainable standard. Ensure that you include price, usage and cost in each standard.

Product :- Clay brick

Ideal standard:- An ideal standard demands maximum efficiency and will require everything to operate optimally. This will mean that there is no breakdown, labour is working efficiently etc. So an example of Ideal standard will be to produce one clay brick with 8mins of labour, working without break, at minimum wages.

Attainable standard:- Currently attainable standards are more realistic and depend on current scenarios and conditions. These are more practical. So an example of attainable standard will be to produce one clay brick with 12mins of labour, working with 15 mins break between 20 bricks , at normal wages.