Standard costs
Each company knows precisely its own fundamental objective, in order to achieve a pre-established goal, different paths can normally be traveled, some collect some information, others establish a precise plan documenting themselves, in order to choose and travel the safest and fastest path to get the goal set. The greater the importance of the objective, the greater attention must be paid to it.
One of the major guidelines of a modern management is to be constantly informed and up-to-date on management methods, in order to implement the most appropriate instrument for the company's requirements.
The problem of choosing the best method to achieve the objectives set must be a problem addressed whenever necessary, therefore, given the changing conditions in the business context, they must be adopted throughout the company and among them, cost accounting.
The company to increase profit, can act in two ways: one increasing revenue and the other reducing costs, the first way is difficult to control, unless it operates under a monopoly, the other way is the reduction cost is much more viable.
The standard cost system, fundamentally, is an organic instrument to control and reduce costs at all management levels and in all the productive or operating units of the company.
In other words, the standard cost system consists of establishing the unit and total costs of the items to be manufactured by each production center, prior to manufacturing, based on the most efficient manufacturing methods and relating them to the given volume of production. They are objective costs that must be achieved through efficient operations.
The essential feature is the use of predetermined or planned costs as a control measure for each cost element during production cycles. Costs are calculated only once rather than each time a production, order, work, or batch phase is started.
If each element of the cost is adequately controlled, the total cost will be equivalent to the total of the controlled elements, the real costs are compared with the standard figures, and the differences or variations that are recorded separately in the accounting are obtained, as a result the differences are typified for investigation and analysis by the administration.
The standard cost procedure presents us with a series of advantages and limitations, which we announce below:
ADVANTAGE:
- Measure and monitor efficiency in the operations of the company, because it reveals abnormal situations or operations, which allows us to set responsibilities.
- Know the unused capacity in production and the losses it periodically causes.
- Know the value of the item in each step of its manufacturing process, allowing the inventories in process to be valued at their correct cost.
- A thorough analysis of manufacturing operations contributing to cost reduction.
- Reduce the administration's work by clearly showing abnormal operations, which deserve much more attention.
- Facilitate the preparation of budgets.
- Standard costs are the essential complement to rational budget organization.
- They generate support in the internal control of the company.
- It is useful for management in terms of information, since it favors decision-making.
LIMITATIONS
- They are applicable to companies whose production plant is rationally organized.
- They are not adoptable to any type of company.
- It would not be recommended for small companies.
- Requires the inventory of short-term inventories of inventories in the manufacturing process.
- Some discomfort for workers as they feel under pressure when trying to achieve the standards.
- A standard cost system is generally applicable to industries that produce in large volume or in series, where manufacturing is repetitive and there is uniformity in the process.
- They are not recommended for operations for small orders or that will not occur again.
Management can use standard costs to determine work methods, measure results, and set responsibilities. Cost control is used to compare and measure results, analyze performance, and determine reasons that explain why actual costs differ from standard costs.
The standard figures facilitate the preparation of financial budgets, production forecasts, sales plans, etc. In other words, standard costs are used as a tool to build a feedback budgeting system, are auxiliary to administrative projections, and provide a reference framework to judge the level of performance in execution.
The attainable standard costs in current operation are the most widely used, because they have the most desirable motivational impact and because they can be used for a variety of accounting purposes, including financial planning and careful observation of the level of performance.
Maintaining up-to-date standard costs in a company makes it easier to budget raw material requisitions, labor for indirect manufacturing costs, which would otherwise be made according to imprecise estimates, it can be said that the standards are a subset of the budgeted universal package.
A budget is an integrated and coordinated plan that is expressed in financial terms, regarding the operations and resources that are part of the organization for a given period, in order to achieve the objectives set by senior management.
In order for a standard cost system to be implemented, the following items are required or must be taken into account so that there is no problem once the decision to adapt it has been made:
- The creation of a code or analytical plan of accounts to identify the origin and nature of the resources.
- An adequate departmentalization of the operation in the company.
- Determination of the specifications of the products and the physical standards of each one.
- Cost centers.
- Normal volume of activity and standard production plan.
- Standard operating practices.
- Technical standard.
- Standard prices.
- Budgets.
- Actual consumption given in standard values.
- Variations and efficiencies.
- Analysis of variations and corrective measures.
The characteristic of standard costs in summary is to provide a direction of goals and objectives towards the results of real costs in a period, it is like delimiting a range of costs which must be established with the entity's budget criteria, taking into account that the budget and the standard costing differ in terms of measurement, since the latter are focused on the results of costs per unit.
The adoption of standard costs is really relevant, since it largely provides efficiency because it allows comparing what is actually used against what is planned, therefore it is a good indicator of the differences in the efficiency of the operation and therefore provides useful information for the management and other users of this, to be able to give a positive or negative diagnosis of the operations carried out by the entity, also this information is used to guide the impact it has on the different production cycles.
When establishing standards for the different cost components, the following should be taken into account:
STANDARD COSTS
EFFICIENCY PRICE
DIRECT MATERIALS $ / unit Q / unit
LABOR Q-Hour wage rate mo / unit
CIF-VARIABLES budget Predetermined base
CIF-FIXED Budget
Base capacity pred.
The standards for direct materials must be based on prices and efficiency, where the former are established taking into account the standard price at which said materials are purchased and efficiency refers to the quantity necessary to produce a unit, for example, if you want to produce 1,000 units and the material price is $ 500 and 10 Q are needed so the standard cost would be (500 * 10) * 1,000 = $ 5,000,000.
In the case of establishing the standard cost of direct labor, they are based on the price of an average wage rate and the number of hours used per unit, taking the same example as above, the standard cost does require 5 man hours and each hour costs $ 1,000, would be: (5 * 1,000) * 1,000 = $ 5,000,000. For manufacturing overhead costs, standards are set according to budget and application rate, or better the predetermined amount of overhead costs per hour or unit, to be absorbed by a finished unit.
An important contribution of the standard costing is the verification and control of the production, when variations are presented they will be explained by the different components of the cost according to the establishment of the standards, which in turn will be measuring performance and efficiency.
There may be variations in direct materials in terms of price and quantity, they are derived from the following calculations:
Q: (QR-Qst) * $ st; QR = actual quantity Qst = standard quantity
$: ($ R- $ st) * QR; $ R = actual price $ st = standard price
This indicates that the variation between the standard and the real is explained by both the quantity and / or the standard price, for example in an inflationary economy such as the Colombian one, it is very likely that the quantities will remain the same but the prices will fluctuate sharply, which will present significant variations.
Variations in direct labor are determined by price and efficiency differences, which are calculated as follows:
Q (Efficiency): (HR-Hst) * Tsst; HR = actual hours Hst = standard hours
$ (Salary rate): (TsR-Tsst) * HR; TsR = Real wage rate Tsst = Standard wage rate
In this case of labor, the differences in standard and real man labor hours can occur due to multiple factors, for example in a stationary economy, that is, when production levels vary according to the season, generated by the increase in demand..
Regarding variations and indirect manufacturing costs, they can be divided into efficiency, budget and capacity, for variable and fixed costs:
CIF-Variables
Efficiency: (BR-Bst) * Tst; BR = Actual base Bst = Standard base
Budget: (GR- (BR * Tst); GR = Real expenses Tst = Standard rate
CIF-Fixed
Efficiency: (BR-Bst) * Tst; BR = Actual base Bst = Standard base
Budget: (GR-Gppt); Gppt = Budgeted expenses
Capacity: (Bppt-BR) Tst; Bppt = Budgeted base.
In a standard cost system, production costs are charged to in-process production inventory at standard cost as well as finished products and cost of sales, taking into account that variations are recorded in separate accounts.
GLOSSARY
• Standard cost: Sets the cost per unit to be incurred.
• Standard costs: Costs that you want to achieve in a given production process.
• CIF Standard: Default amount of CIF per unit or per hour, which would go into the production of a finished unit.
• Direct Labor Efficiency Standard: Default performance standards based on the direct labor costs that would go into producing a finished unit.
• Direct labor price standard (rate): Salary rates for a given period.
• Direct Materials Efficiency Standard: Default specifications for the amount of direct materials that would go into the production of a finished unit.
• Direct Materials Price Standard: Unit prices at which direct materials could be purchased.
• Variation: The difference that arises when the actual results are not equal to the standard results, due to internal and external factors, can be favorable or unfavorable.
• Proration of variations: The treatment given at the end of the period to the resulting variations.
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