Question

1) Describe standard costs?

2) Explain how one distinguishes between Standards and Budgets?

3) How does one go about setting standard costs?

4) differentiate between ideal versus normal standards?

Answer 1

1)A standard cost has been described as a predetermined cost, an estimated future cost, an expected cost, a budgeted unit cost, a forecast cost, or a "should be" cost. Standard costs are often a part of a manufacturer's annual profit plan and operating budgets. Standard costs will be established for the following year's direct materials, direct labor, and manufacturing overhead.

2)There is not much difference between standards and budgets. In cost and management accounting, the term “standard cost” means the budgeted cost of one unit of product and the term budget means the cost of whole budgeted production.A budget usually refers to a department's or a company's projected revenues, costs, or expenses.

3)Manufacturing companies determine the standard cost of each unit of product by establishing the standard cost of direct materials, direct labor, and manufacturing overhead necessary to produce that unit. Determining the standard cost of direct materials and direct labor is less complicated than determining the standard cost of manufacturing overhead.

4)A company will either set up either one of the two types of levels, ideal or normal. Normal levels are levels set where the expected performance goals are attainable, and efficient, as long as the conditions are normal and there aren’t any extenuating circumstances. Ideal standards are the performance levels under perfect operating conditions. If everything was always perfect, we would have ideal, but that is almost never the case. Some managers think that setting the ideal, as the goal will be incentive to the employees, however most companies use normal standards because the ideal is very difficult to meet, and open up the likelihood of unethical behavior.