STANDARD COSTING IN A

MANUFACTURING FIRM
Shahid Mahmood Awan

MBA (HRM) 2nd

Semester
(2010-2012)

Allama Iqbal Open University

Agenda
 Introduction

 Standards Should Be Set At A Realistic Level

 Identify Unfavorable Variances

 Introduction to the issue

 Data collection methods

 Swot Analysis

 Conclusion & Recommendations

 Standard Costing:
 Standard costs are usually associated with a

manufacturing company's costs of direct

material, direct labor, and manufacturing overhead.

 Standards may be set by engineers, production managers,

purchasing managers, and personnel administrators.

 Standards may be established through test runs or

mathematical and technological analysis. Standards are

based on the particular situation being appraised
 Standards should be set at a
realistic level.
 Those affected by the standards should participate in
formalizing them so there will be internalization of goals.
 Standards that are too loose will result in inefficient
operations.
 If employees receive bonuses for exceeding normal
standards, the standards may be even more
effective as motivation tools.
 Variance Analysis
 is usually is complicated by the problem of
computing the number of equivalent units of
production
 Variances may be controllable, partly controllable, or
uncontrollable.
 The extent to which a variance is controllable depends on
the nature of the standard
 A standard cost system establishes a predetermined
figure that companies expect will represent actual
production costs.
Identify Unfavourable Variances
  Standard costing techniques help a company measure
material and labor variances.
For example,
the company may expect to produce 1,000 units with
standard material costs of $5 and standard labor
costs of $9 per unit. Actual production costs,
however, are $5.75 for materials and $9.50 for labor
costs, resulting in unfavourable variances of 75
cents and 50 cents, respectively. The variances help
companies focus on specific areas for implementing
corrective measures to improve operating costs.
The Need for Standards:
 Standards
Are common in business
Are often imposed by government agencies (and
called regulations)
 Standard costs
Are predetermined unit costs
Used as measures of performance
 
Process of Standard Costing:

Distinguish between a standard and a budget.

Identify the advantages of standard costs.
Describe how standards are set.
Discuss the reporting of variances.
Make conclusion
The Setting of Standard
a. A managerial accounting decision.
b. A management decision
c. A worker decision.
d. Preferably set at the ideal level of
performance
 Advantages of standard
Costing
 Facilitate management planning
 Promote greater economy by making employees more
“ cost- conscious”
 Useful in setting selling prices
 Contribute to management control by providing basis
for evaluation of cost control
 Useful in highlighting variances in management by
exceptions
 Simply costing of inventories and reduce costs
Disadvantages of Standard Costinng
The use of standard costs can present a
number of potential problems or
disadvantages.
 Standard cost variance reports are usually prepared on
a monthly basis and often are released days or even
weeks after the end of the month.
 If managers are insensitive and use variance reports as
a club, morale may suffer. Employees should
receive positive reinforcement for work well done.
 Standard Cost and Estimated
Cost
 Both the standard costs and estimated costs are used
to determine price in advance. The purpose of both
the system is to control cost.
 Estimated costs are based on historical accounting. It
is an estimate of what the cost will be. It is a cost of
guess work or reasonable estimate for the costs in
future.
 Estimated costs cannot be used to determine
efficiency.
Dollar
 Dollar is the leading writing instruments and
stationery manufacturer in Asia, with exports to more
than 50 countries in all five continents.
 Established more then half a century

 Dollar of stationery has attained the

status of a heritage brand and a household name in
Pakistan
 
PRODUCTS
MARKERS
White Board Markers
Hi-lighters
FIBER TIP PENS
FOUNTAIN PENS
BALL PENS
 Ink
 Glue stick
 Staples
SWOT Analysis
Strengths
 Experienced, broad base of interests and knowledge
 Differentiated, Variation in products
 Diverse, and local awareness & Very experienced,
high knowledge
 High sales revenue, high sale growth, large capital base
Continuous efforts to research trends an reinforce
creativity
SWOT Analysis
Weaknesses
Large size may lead to conflicting interests
So much product lines but still not able to knock
out in Ink.
High expenses, may have trouble balancing cash-
flows of such a large operation
SWOT Analysis
Opportunities
 Distinctive name, product and packaging in with
regards to its markets
 Increase in the population
 Maintenance of proper website which subscribes and
provides information regarding long production line.
SWOT Analysis
Threats
 Illiterate people go for loose stationary product which
is substandard as well
 Intense competition can pay so they have to keep eyes
open
 Competitors are global leaders so they have more
technology as compared to PARKER PEN
Standard Costing In Dollar
 Aid in inventory costing
 Assist in decision making
 Sell price formulation based on what costs should be
 Highlight problem areas through the “management by
exception” principle
 Motivate employees to accomplish predetermined
goals
 Assist in planning by forecasting needs (e.g., cash
requirements)
Standard Costing In Dollar
Date Account Name Debit Credit

Jan. 8, 2010 Direct Materials Inventor 3,000

y Accounts Payable 2,900
Direct Materials Price V
ariance 100
 Standard Costing In manufactures
Jeans Standard Actual
Actual denim manufactured 160.00 160.00

Standard for Manufacturing each Unit 2.00 2.44

Total standard material for the actual
manufactured—Total Amount of material
that should have been used
320.00 390.00
to make the good output

Standard cost per Unit 3.00 3.00 2.60

Standard cost of units in the good
960.00 1014.00
output—the jeans actually produced
960.00 1014.00
Standard Actual Variance Variance RS

320.00 3 90.00 - 70.00 - 2 10.00 (adverse)

3.00 2.60 0.40

156.00(favourable)
- 5 4.00
Conclusion
 A standard cost is a predetermined cost of
manufacturing, servicing, or marketing an item during
a given future period.
 It is based on current and projected future conditions
 The norm is also dependent on quantitative and
qualitative measurements
 Standards may be based on engineering studies
looking at time and motion.
 The formulated standard must be accurate and useful
for control purposes.
Recommendations
 Labor quantity standards and efficiency variances
make two important assumptions.
 First, they assume that the production process is
labor-paced; if labor works faster, output will go up.
 Second, the computations assume that labor is a
variable cost.
 Just meeting standards may not be sufficient;
continual improvement may be necessary to survive in
the current competitive environment.
Questions, Answers and Comments?
Thanks!

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