Question

Habib Gulzar is planning to open new production line in Kabul, where they are going to produce variety of juices. They are hiring staff for the production unit like workers, cost accountants, production manager and managerial accountants. You are interested in the position of managerial accountant as they are offering good package. After your submitting application for the position you are called for an interview. In order to impress the interviewers, you are required to provide effective answers for the following questions asked during interview: 1. Can you explain with a help of an example how idle standards are different from practical standards? Being a managerial accountant which standard you will follow to standardize cost of product? 2. How does the content of reports and the verification of reports differ between managerial and financial accounting? 3. Decision making is management’s most important function.” Do you agree? Why or why not? 4. What will be the total manufacturing costs? Let’s say Habib Gulzar Manufacturing Inc. has beginning work in process AFN 26,000, direct materials used AFN 240,000, direct labor AFN 200,000, total manufacturing overhead AFN 180,000, and ending work in process AFN 32,000. 5. Which process you will follow as a managerial accountant to determine predetermined overhead rate/ standard overhead rate, in the process of standard costing? 6. What are the similarities and differences between standards cost and budgets

Answer 1

1)

Ideal standards:
Ideal standards are standards that do not allow for normal wastage and work interruption due to breakdown of machinery, employees’ rest periods, shortage of raw materials or any other reason. The achievement of such standards requires highly skilled and motivated workers and the best possible use of production facilities. In short, we can say that the ideal standards can only be achieved under the best and perfect work circumstances. The use of ideal standards is not common among companies because they are based on highly strict assumptions that do not allow even the normal inefficiencies.

Practical standards :

Practical standards are standards that are challenging but achievable through the use of efficient and motivated workers under normal working conditions. They allow for work interruptions because of machine breakdowns, workers’ rest periods and other conditions that are considered normal in a particular work environment. Most of the companies using standard costing system set practical standards rather than ideal standards

Practical standards have the following advantages:

1. While setting practical standards management does not assume the perfect, but normal working conditions. Therefore, the variances from practical standards reflect abnormal conditions that really need immediate attention towards remedial actions.
2. Practical standards take into account all normal wastage and inefficiencies and can, therefore, be used for inventory planning and forecasting cash flows.

As a Managerial accountant, I'll follow Practical standard.

2)

3)

The smooth flow of management activities is from planning through directing and controlling, and then back to planning again. All of these activities turn on the hub of decision making. Thus, decision making is management's most important function. Decision making is a very important function for the management because to take any decision for the development of the company or to set up any standards or estimations to achieve will have a major impact on the performance and growth of the company. In simple words, the overall performance and profitability of a company completely depend on the decisions taken by the management only.

4)

Total Manufacturing Cost = Direct Material + Direct labour + Manufacturing Overhead+ Beginning Work In Process - Ending Work In Process

= 240000+200000+180000 +26000-32000

= 614000

5)

In a standard cost system, overhead is applied to the goods based on a standard overhead rate. This is similar to the predetermined overhead rate used previously. The standard overhead rate is calculated by dividing budgeted overhead at a given level of production (known as normal capacity) by the level of activity required for that particular level of production.

Predetermined overhead rates are used to apply overhead to jobs until we have all the actual costs available. To create the rate, we use cost drivers to assign overhead to jobs. A cost driver is a measure of activities, such as machine-hours, that is the cause of costs. To assign overhead to jobs, the cost driver should be the cause of the overhead costs, or at least be reasonably associated with the overhead costs.

As a Managerial accountant, I ll use standard overhead rate as it gives clear picture of the entities performance.

6)

Similarities

	Standard Costing	Budgeting Cost
Predetermined cost	Standard costs are predetermined costs fixed according to estimates.	Budget costs are also estimated costs.
Advance cost	Standard costs are estimated in advance, these are compared to actual costs.	These costs are also estimated in advance and these are compared to actual costs.

Difference

Basis of difference	Standard Costing	Budgetary Costing
Base	Standard costs are predetermined or planned costs.	Budgetary costs are based on past experiences
Technique	Standard costs are based on technical estimates.	The budgetary costs are based on historical data and adjusted to the future.
Scope	The standards are set for elements of costs.	The budgets are prepared for every business activity.
Limited use	Standard costs can be used for estimation or forecasting.	Budgets are used for men, material and money.

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