Section A Planning and Budgeting Concepts which the work - TopicsExpress



          

Section A Planning and Budgeting Concepts which the work flows are included in the analysis. Standard cost specifications are designed in accordance with each individual situation. Flexible budgets work with standard cost systems. The standard cost system provides data for the computation of the predetermined overhead rates to use in the flexible budget and for variance analysis of overhead expense. Most companies use practical expected standard costs in their standard cost system and in their flexible budgets. If they choose not to do this, then management will have an additional variance to report: the variance between the practical expected costs and the ideal theoretical costs. Setting Standard Costs Standard costs are derived from general standards for operations. Several resources are used in determining standards for operations. These are: 0 Activity analysis, 0 Historical data, 0 Target costing, 0 Strategic decisions, and 0 Benchmarking. Activity Analysis Activity analysis is the most accurate way of determining standard costs, if it is properly executed. It involves identifying and evaluating all the input factors and activities that are required to complete a job, a project or an operation efficiently. Activity analysis is performed by people from several different areas, including product engineers, industrial engineers, management accountants and the production workers. Product engineers specify the components to be used in the manufacturing of a product. Industrial engineers analyze the procedures required to complete the manufacturing process. Management accountants work with the engineers to complete the analysis. The analysis specifies the quantity and the quality of the direct materials, the required skills and experience of the employees who will produce the product, and the equipment to be used in producing the product. The management accountants contribute the costs of the direct materials, the employees, the overhead and other items to arrive at the total standard cost. Historical Data While activity analysis is the most accurate means to determine standard costs, the cost of the activity analysis itself can be prohibitively high. If a firm cannot justify the high cost of activity analysis, it can use historical data instead. Data on costs Involved In the manufacture of a similar product In prior periods can be used to determine the standard cost of an operation, if accurate data is available. Analysis of historical data is much less expensive than activity analysis for determining standard costs. However, a standard cost based on the past may perpetuate past inefficiencies. Furthermore, a standard based on the past does not incorporate continuous improvements, which are an important standard in the competitive environment in which businesses operate today. Target Costing Target costing is used when a firm has a set selling price at which it desires to sell its product in order to be competitive. The target cost is the cost that yields the required profit margin for the product, given a set selling price. Standards are then determined so that the product can be manufactured at the target cost.
Posted on: Sun, 09 Mar 2014 09:07:33 +0000

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