Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

16.1.2 Average Costs and Standard Costs

Intended learning outcomes: Differentiate between standard costs and average costs. Explain standard cost rates.

Many organizations have introduced standard cost accounting systems because of the difficulties associated with actual costing systems.

Standard costs are an estimate, a prediction, of actual costs.

Standard costs are used as the basis for budgeting and for analyzing variances (the differences that arise between targeted and actual results) in job order costing. Standards for costs, quantities, and times are also a useful means of cost estimating for a new product, particularly if it is comparable to previous products. In general, standard costs are determined on the basis of the average costs.

The average costs for an item are the average last-in costs of this item. They refer to the item’s unit of measure.

Average costs can be determined using the same techniques that were described for historically oriented forecasting in Section 10.2.

At the end of the budget period, such as at the end of every year, the average costs are carried over as the new standard costs. Here it is important to consider factors similar to those outlined in Chapter 10 for forecasting techniques, in particular for trend forecasting. At this point, cost accounting also determines the new standard cost rates.

Standard cost rates for labor costs per work center include, firstly, as direct costs, the expected wage rate for the workers, and secondly, overhead costs, for which cost accounting establishes the depreciation requirements and divides them by the load forecast expressed in capacity units, for the new  udget period.

For every operation, the same principle applies: calculation of the average values for the standard load of an operation, the setup load of an operation, the setup time, the run load of an operation, and the run time (see Section 13.1.2 for an explanation of these terms) on the basis of the actual load recorded during the processes. These values are then combined with other measurements to determine standard quantities and standard loads.

As far as possible, standard costs, cost rates, quantities, and times should not change over the course of a budget period. However, it may be necessary to modify standard values over a budget period if the average values vary widely from these standard values.

As a prerequisite for calculating standard costs and quantities, the processes must be easy to measure and occur sufficiently frequently to allow the calculation of a statistical mean. They must also exhibit a degree of continuity, so that the predetermined standard quantities, times, costs, and cost rates will still be meaningful in the future.

Course section 16.1: Subsections and their intended learning outcomes

  • 16.1.4 Cost Accumulation Breakdown: The Cost Breakdown Structure of a Product

    Intended learning outcomes: Explain cost accumulation breakdown. Present in detail material costs, external and internal labor costs. Produce an overview on tooling costs and general fixed manufacturing costs. Differentiate between variable manufacturing costs and (full) manufacturing costs. Identify general and administrative expenses (G&A) and cost of sales. Describe value added.

Print Top Down Previous Next