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Standard Costs

Standard Costs

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Published by ClassOf1.com
Setting a budget is never easy as it involves predicting the future and therefore uncertainty. The process is not about getting the budget absolutely right; it is about not getting it too wrong. This budget process may be applied to most revenue budgets that deal with income and costs, but there is also a requirement to produce a capital budget that covers the purchase, sale and replacement of fixed assets.
Setting a budget is never easy as it involves predicting the future and therefore uncertainty. The process is not about getting the budget absolutely right; it is about not getting it too wrong. This budget process may be applied to most revenue budgets that deal with income and costs, but there is also a requirement to produce a capital budget that covers the purchase, sale and replacement of fixed assets.

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Categories:Types, School Work
Published by: ClassOf1.com on Jun 26, 2013
Copyright:Attribution Non-commercial

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06/26/2013

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Finance
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Sub: Finance Topic: Budget cost
*
Standard Costs
Setting a budget is never easy as it involves predicting the future and therefore uncertainty. Theprocess is not about getting the budget absolutely right; it is about not getting it too wrong. Thisbudget process may be applied to most revenue budgets that deal with
income and costs
, but there isalso a requirement to produce a capital budget that covers the purchase, sale and replacement of fixed assets. There is normally an investment limit dictated by funding availability and depreciationcosts. The actual expenditures will be decided on the submission of business cases. Capital itemsusually involve sizeable cash outflows so their timing is an important element of the cash flow budget.In many organizations the budget process commences with the timetable, templates and guidancenotes being issued by the finance department. Those in the finance department may be the stewardsof the process, but they will often be too detached from the operations to be able to construct a validbudget themselves. Hence operational managers have to complete most of the templates. Headlinebudget values may be agreed for the whole business, and then parts of this will be allocated todivisions, departments and individual budget-holders. The budgets of central departments such asfinance, information technology and human resources can be drawn up in parallel to the operationalbudgets so that all departmental budgets can be completed within a short time frame.In setting budgets it can be helpful to break down cost areas into component building blocks.
Forexample
, in a manufacturing environment the budget for cost of sales is wholly dependent upon salesvolumes and the mix of products. Therefore knowing the
budget cost (or standard cost)
per unit willspeed up the process. If,
for example
, the manufactured product is easy chairs, a typical process willstart by setting standard quantities for the component parts such as wood, fabric and consumables.Using predicted prices the standard cost for each product can be calculated. To make the chair willrequire labor and machine time.
Standard durations
for each process can be identified, such ascarving the wood, assembling the frame and covering it with fabric. Knowing these times helps to
 
 
Sub: Finance Topic: Budget cost
*
predict the amount of labor required to constructing the anticipated product volume and hence theoverall headcount and the labor cost budget. Setting the standards can be difficult, particularly forlabor hours. Carefully timing individuals may encourage them to operate slowly so they are not settoo high a production rate. Encouraging quicker speeds may affect quality. An efficient andsustainable standard enables the workforce to remain motivated, standards of quality to be upheldand budgeting to be more realistic.

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