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Standard Cost System for Manufacturers
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Standard costs are target costs. As work is completed, actual costs are compared against the standard costs to generate variances which are then analyzed in order to determine what can be done better the next time. In the manufacturing process, there are several types of standard costs that should be set up. Material price standards are usually based on expected prices for the coming year, with a separate standard for each component that is expected to be purchased. Since material prices are set by external companies, accurate standards are a function of accurate price forecasting. Material quantity standards are set up according to the standard quantities of each type of material to be used in the manufacturing process, which is known as the standard bill of materials. Labour rate standards are also based on accurate forecasting, since they result from union negotiations or local supply and demand in the labour market. Labour efficiency standards are the standard times expected to be taken by the factory workers in the production of manufactured units. These standard times should be set by properly trained engineers, while taking into account the type of equipment used, working conditions, quality of instructions for the worker, rest time and defective material. These standard times should be set for each individual operation. The accounting system is set up to record the standard cost of actual production as well as the variances from the standards. The variances are then analyzed on a regular basis to ensure that the reasons are known and documented in order to design possible remedial action. For example, it might be determined that there is a problem with July labour efficiency, due to inexperienced summer workers and summer heat. This would then be referred to management for possible methods of addressing the problem if it was deemed significant enough. Please contact Simkover and Associates at 905-943-4046 if you need further advice in relation to this topic.
Please contact us at 905-943-4046 if you need further assistance or accounting services in the coming months. Click here for additional contact information