standard costs and balanced scorecard 1

This week’s Discussion topic is about setting standards for performance evaluation. Organizations set standards to effectively utilize standards in evaluating performance.

Respond to the following in a short memo addressed to your instructor:

  1. What are the comparative advantages and disadvantages of ideal versus normal standards?
  2. What are the factors that should be included in setting the price and quantity standards for direct materials, direct labor, and manufacturing overhead?

Just do response each posted # 1 to 3 down below only

Posted 1

What are the comparative advantages and disadvantages of ideal versus normal standards?

Ideal Standards compared to Normal Standards are varied depending on the location and management. Ideal standards represent optimum levels of performance under perfect operating conditions. Normal standards represent efficient levels of performance that are attainable under expected operating conditions. From the text we see that most establishments do normal as the ideal approach lowers the morale. I personally have been in a few places that I feel have been under ideal standards and wouldn’t surprise me that they weren’t.

What are the factors that should be included in setting the price and quantity standards for direct materials, direct labor, and manufacturing overhead?

The standard for each element is derived

from the standard price to be paid and the standard quantity to be used.

Direct material raw price is best estimate cost of raw material. Direct

material quantity standard is determined by management.

Posted 2

There are advantages and disadvantages when comparing ideal and normal standards. Normal standards are when the business is expected to run at a normal and efficient level. This allows the business to set sales projections and budgets based on historical data and project revenue for the next budget period. The disadvantage of using this standard is that if a business can perform over the normal level, the budget may not support this level and not be able to fund the increased production that is available.

Ideal standards are what the business can do when it is running perfect (Weygandt, Kimmel, & Kieso, 2018). This is above the normal and expected level and gives management an idea of the potential of the full capacity of the business. The advantage of this standard can be a goal for the business to reach in the future, and to set a long-term goal to reach. There can be a disadvantage using this standard as well if a business sets their goals and budgets to meet this level. If this ideal level cannot be achieved, the business will not meet their goals, they may purchase too many materials, and morale can lower when departments are not meeting their goals.

When we need to set the price and standards for direct materials, direct labor, and manufacturing overhead, there are factors that we must include. For direct materials, we must determine the amount of materials that will be needed to meet production needs and take into account that there will be waste and the occasional mistake that will take up resources. Determining the proper amount of materials that we should order for each unit will ensure we have enough direct materials for our production needs.

The direct labor is similar. The direct labor price must include the production time, as well as any setup or cleanup of the produced unit. We also must include any benefit costs and taxes payable to ensure that we are appropriately setting the correct rate to apply for each unit of production.

The standard predetermined overhead rate can be used to properly and accurately set manufacturing overhead costs (Weygandt, Kimmel, & Kieso, 2018). The rate will use the budgeted manufacturing overhead costs in the master budget, and then divide that by either the direct labor hours or machine hours to determine the rate. We then can use that rate to assign a monetary value to each unit of production. Using these factors will allow us to apply an appropriate total cost for a unit of production, which will allow us to determine the breakeven point and potential revenue based off the selling price and projected sales.

Posted 3

Hi Class and Professor

Normal standards are the ones that are most widely accepted and “fit” the majority of needs such as cost, quality and lead time. The ideal standard would be unrealistic to most as the costs and time to produce would exceed what most consumers would consider perceived value. Normal standards allow for acceptable parameter for cost, quality and time to produce that helps to reduce costs, control lead time, and produce at an acceptable quality level. By using the normal standards more consumers can use the product as the perceived value will be much higher than if it were produced to the ideal standard.

Factors that should be included in setting standards can be things such as, power to negotiate pricing breaks on direct materials, cost of labor skilled enough to produce the product, and cost of doing business in the area that the factory would be set up. Geographic location will also make it easier to transport direct material in and finished product out more efficiently and would need to be considered.

 

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