Methods used to derive Standard costs

NotesQuizPaper exam

Cost Card

A standard cost is based on technical specifications for the materials, labour time and other resources required and the prices and rates for the materials and labour.

A standard cost card shows full details of the standard cost of each product.

Standard cost card - product A
$
Direct material x kgs / ltrs x
Direct labour x hrs @ $x x
Direct expenses x
--
Standard direct cost (prime cost) x
Variable production overheads x
--
Standard variable cost of
production
x (marginal costing)
Fixed production overhead x
--
Standard full production cost x (absorption costing)
Administration & marketing
overhead
x
--
Standard cost of sale x
Standard profit x
--
Standard sales price x
==

Four main types of cost standards

  1. Basic standards 

    – these are long-term standards which remain unchanged over a period of years. 

    They are used to show trends over time. 

    Basic standards may become increasingly easy to achieve as time passes and hence, being undemanding, may have a negative impact on motivation.

  2. Ideal standards 

    – these standards are based upon perfect operating conditions. 

    Therefore, they include no wastage, no scrap, no breakdowns, no stoppages, no idle time. 

    Since perfect operating conditions are unlikely to occur for any significant period, ideal standards will be very demanding and are unlikely to be accepted as targets by the staff involved as they are unlikely to be achieved. 

    Using ideal standards as targets is therefore likely to have a negative effect on employee motivation.

  3. Attainable standards 

    – these standards are based upon efficient but not perfect operating conditions.  

    These standards include allowances for the fatigue, machine breakdown and normal material losses. 

    Attainable standards motivate performance as they can be achieved can be used for product costing, cost control, inventory valuation, estimating and as a basis for budgeting.

  4. Current standards 

    – these standards are based on current level of efficiency and incorporate current levels of wastage, inefficiency and machine breakdown. 

    They do not provide any incentive to improve on the current level of performance. 

    Their impact on motivation will be a neutral one. 

    Current standards are useful during periods of high inflation.

NotesQuizPaper exam