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Using Chapter 7 of your text as a reference, define a standard cost and explain what constitutes the components of a standard cost. Describe the advantages and disadvantages of a standard cost system and explain under what circumstances a standard cost system is most effective. Your initial post should be 200-250 words.
According to Schneider (2012), standard cost for a product “is the amount that management believes one unit of product should cost and consists of a price standard (a generic term indicating price for materials, rate for labor, and rate for factory overhead) and a quantity standard (a generic term indicating quantity for materials, time for labor, and activity or volume for factory overhead)” (sec. 7.2). Standards are generally stated on a per unit basis and are set for price and quantity by management decisions, various studies, vendor analyses, etc. (Schneider, 2012). The five main advantages of a standard cost system are cost control, cost management, decision making, record keeping costs, and inventory valuation. Cost control involves comparing actual performance against standard performance in order to identify controllable causes and take action to correct or adjust future planning and control. Cost management establishes the level of costs that becomes the benchmark for measuring performance and assists with eliminating unnecessary activities as well as highlight exceptional performance. Standard costs are useful in making decisions and a standard cost system saves record keeping costs in the long run. Lastly, a standard cost system records the same costs for physically identical units and products by inventory valuation (sec. 7.2). Disadvantages of a standard cost system include expense, time consuming, obsolescence, and complexity. The system of standard costing is expensive to install, a lot of time is spent developing and installing reliable system, in fast changing conditions standards become out of date quickly, and some systems are overly elaborate and not easily understood by personnel (BusinessWritingServices, n.d.). Although the system of standard costing is useful in all types of industries it is most effective when applied to industries that produce standardized products which are repetitive in character such as process and engineering activities.
BusinessWritingServices. (n.d.). Disadvantages of standard costing. Retrieved from http://www.businesswritingservices.org/finance-costing/advantages-and-disadvantages-of-standard-costing.pdf
Schneider, A. (2012). Managerial accounting: Decision making for the service and manufacturing sectors. San Diego, CA: Bridgepoint Education
Define a standard cost and explain what constitutes the components of a standard cost. Describe the advantages and disadvantages of a standard cost system and explain under what circumstances a standard cost system is most effective.
There are two components that constitute a standard cost, as mentioned in Managerial Accounting: Decision Making for the Service and Manufacturing Sectors:
A standard cost for a product is the amount that management believes one unit of product should cost and consists of a price standard (a generic term indicating price for materials, rate for labor, and rate for factory overhead) and a quantity standard (a generic term indicating quantity for materials, time for labor, and activity or volume for factory overhead). (Schneider, 2017, p. 316).
The standard cost system consist of both advantages and disadvantages to its use. There are five notable advantages to the standard cost method, cost control, cost management, decision-making, record keeping costs, and inventory valuation. Cost control is a benefit because it allows a company to conduct a comparison between actual and standard performance, while also permitting cost management to establish a target to measure such performances. The use of the standard cost system also benefits from it ability assist in various decision-making situations and saves recordkeeping costs by allowing for effective inventory valuation.
However, there are also disadvantages to the system. For instance, the system follows the principle of management by exception, which can be a benefit except when applied to people. According to Schneider (2017), “if a worker is ignored when operating according to the standard and is noticed only when something is wrong, the worker may become resentful and perform less satisfactorily. The implementation of a standard cost system is most effective when used in an organization where standardized products or standardized operations occur (Schneider, 2017). Company’s that have a need for repetition will best benefit from the standard cost system.
Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
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