The Standard Cost System

1
The Standard Cost System

• Corey Doyle
• Rad Davenport
• Dave Rose

2
Management Accounting

• Process of identifying, measuring, accumulating,
  analyzing, preparing, interpreting, and
  communicating financial information which is used
  by management to plan, evaluate, and control an
  organization

3
Standard Cost System Problems

• 1. Based on assumptions that are invalid in
  todays environment
• 2. Strives for local optimization, meaning it is
  local in scope and tries to reduce cost of each
  process and each product in isolation, which
  causes suboptimization in the global business
  level

4
Standard Cost Principles

• 1. Total cost of the system Sum of cost at each
  operation.
• 2. Total cost at each operation is proportional
  to the cost of direct labor for that operation.
• 3. Total cost of the system (excluding material
  cost) is proportional to the sum of the direct
  labor costs.
• 4. Standared cost procedure, which utilizes the
  calculated overhead/direct labor ratio, can be
  reversed to estimate the impact of any action on
  the total cost system

5
Considerations that Need Attention

• Capacity Requirements-new equipment actually
  needed? Are machines fully utilized? Does
  capacity need to be increased?
• Reduction of direct labor-are the labor hours
  actually reduced? Is reduction of labor
  sufficient to purchase new machine? Does labor
  reduction concur with company policy
• Allocation of overhead costs-Did total labor
  actually change? Costs of other procedures
  increased?

6
Cost Accounting

• Material cost can be traced to the product
• Labor cost can be traced to the product because
  the number of different products manufactured is
  small, and labor is compensated on some sort of
  piecework basis
• The overhead dollars which must be arbitrarily
  allocated must comprise a relatively
  insignificant portion of the total cost

7
Cost Accounting Problems

• Most cases labor cant be accurately traced to
  specific products
• Overhead cost proportions have changed over time.
  Overhead costs have grown substantially while
  labor costs have decreased.
• Only material cost can be accurately traced to
  the product.

8
Activity Based Costing System

• Tries to remedy old accounting methods
• More complicated and involved than old systems
• Costs can be allocated on an arbitrary basis
• Can the system be accurate if it can be decisions
  are sometimes arbitrary?

9
Validity of ABC Systems

• Since companies are so complex and true cost
  relationships are virtually impossible to
  untangle
• All activities in the purchasing department must
  be considered
• ABC only allows for one driver to reflect all
  activities
• Common costs are shared by more than one product
  and thus hard to allocate between them.

10
Conclusion

• No such thing as a true product cost, all such
  estimates are only figments of our assumptions