Standard Cost

cost that management believes should be incurred to

produce a good or service under anticipated conditions
Standard Cost

Predetermined
cost
Planned
cost
Cost of single unit

Budgeted Cost

cost, at standard,
of the total number
of budgeted units
Both are estimated costs
Referred
to
as Referred
to
as
flexible budget
master budget
Should be attained

Expected Cost

Most likely to be
attained

Types of Standards to be applied:

Ideal Based on high degree of efficiency/perfection
Attainable under the most favourable condition
Basic Fixed in relation to base year
No response in change in costs
Curren Realistic for control purposes
t
Establish for use in short term period
Allowance for normal spoilage
Expect Standard which may be anticipated to attained
ed
during a future specified budget period
Norma Average standard in past which, it is anticipated, can
l
be attained over a future period of time, preferably
long enough to cover one trade cycle 1 year
Standard
Compare Deviation Variance
Actual

Static Budget (Fixed

Flexible Budget (Variable
Budget)
Budget)
Based on planned level of
Based on budgeted revenues
output at start of the budget
and cost based on actual level
period
of output
1 level of sales and output
Various level of sales
Designed
to
remain Set of alternative budgets at
unchanged irrespective of the different expected levels of
level of activity attained
activity
Variance
Differences between actual Differences between actual
results and the static budget results and the flexible
for the original planned level budget for the actual level of
of output
output achieved
reflect how actual results
deviate from what was
expected,
given
the
achieved activity level

Effectiven
ess
Efficiency

the degree to which a goal, objective, or target is

met
the degree to which inputs are used in relation to
a given level of outputs

Variance Analysis - process of analyzing variance by

subdividing the total variance in such a way that management
can assign responsibility for off-Standard Performance
Material
Variance
Material
Variance

Price

Purchasing Manager

Quantity

Production Manager

Labor Rate Variance

Labor
Efficiency
Variance
Variable OH Variance
Fixed OH Variance

Human
Resource
manager
Production Manager
All above, etc.
Production manager

Relevant Cost

future incremental cash flow, arising as a direct

consequence of a decision made

cost differs between alternatives

deal with future costs

Examples:

Hire, make or buy decisions

Special order decisions

Retain or replace equipment decisions

Sell or process further decisions

Eliminate or retain an unprofitable segment decisions

Variable
Product costs - Direct material, direct labor
Variable
overhead linked to a particular product or
Fixed
division
Opportunit
next best alternative foregone by you choosing
y
to make a future decision
Avoidable
Can be avoided/eliminated by choosing the
other alternative
Differential
costs which are the difference in total cost
/
difference between between the make-parts
alternative decisions and buy-parts of a

Incrementa
l

additional
total
cost incurred for
an activity

product
additional cost incurred for
hiring
3
technicians
instead of 2 technicians

Non Relevant Cost

Sunk/Histo have already been incurred
rical
and cannot be recovered
in the future
Every decision should deal
with future costs and not
historical costs.
Committed
costs will be incurred in the
future irrespective of the
decision taken as they are
unavoidable
Fixed Cost
usually irrelevant costs,
unless they are avoidable
fixed costs
no actual cash flow has been
Notional

incurred as a result of the

decision
simply
book
entries
for
accounting purposes

Common

costs that are identical for

all alternatives taken and
therefore not relevant to
decision making

Future

Generally not relevant in

DMP
irrelevant
for
sell
or
process further decisions

Joint costs

Research
and
development
costs,
original
cost of material
or machinery
Rent agreement
on a building

Depreciation
or
head
office
charges
apportioned cost
between
joint
products
within
processing
accounts

*napamahal
Added to COGS
Deducted to Operating Income

*napamura
Deducted to COGS
Added to Operating Income

EXAMPLE:

Actual cost
Standard Cost
Cost Variance applies only to absorption costing operating
income
Actual > Standard =
Actual < Standard =
Unfavorable
Favorable

Budget plan expressed in quantitative terms on how the

management desires to manage or control its OIF resources and
activities to promote the overall goals of the enterprise in a given
period of time
Essentials of a Budget
1.
It is prepared for a definite future period.
2.
It is a statement prepared prior to a defined period of time.
3.
The Budget is monetary and I or quantitative statement of
policy.
4.
The Budget is a predetermined statement and its purpose is
to attain a given objective.
Budgeting process of formally expressing the plans of an enterprise
in financial terms.
Forecasting process of predicting/estimating a future happening

On the basis of time

Long term
prepared for a longer
period varies between
5-10years
developed by the top
level management
summarise the general
plan of operations and
its
expected
consequences

Short Term
prepared
for
a
period of one year
shorter period as for
quarterly or half
yearly

Current
prepared
for
the
current operations
planning generally in
months or weeks

On the basis of Function

Functional
relates to any of the
functions
of
an
organization

1.
2.
3.
4.
5.
6.
7.

Master (summary budget)

summary
budget
incorporating its functional
budgets, which is finally
approved,
adopted
and
employed
Sales Budget
1. Operating budgets
Purchase Budget
2. Financial budgets
Production Budget
3. Special decision budget
Selling and Distribution
Cost Budget
Labour Cost Budget
Cash Budget
Capital
Expenditure
Budget

On the basis of Capacity

Target Costing determining the most allowable cost for a

new product, then developing/designing prototype/expenses to
be incurred in the production

Anticipate
d Selling
Price

Desired
Profit or
ROI

Target
Cost

Developed in recognition of 2 important characteristic of:

Marke Supply and demand
t
Determine prices
Companylesser control over price
Cost Product cost is determined in the design
stage
Target Costing: Cost Design
Other Approach: Design Cost
Involves:
Selecting/involving suppliers
Design modification
Outsourcing
Involvement/Kaizen

Just in Time System/Lean Manufacturing

Requirement: system, workflow, reliable supplier

Manufacturing procedure: demand pull units produces is

determined by the demand
Purchasing raw materials are received JIT to go in production
Manufacturing parts are completed JIT to be assembled in
companys product, and products are manufactured JIT to be
delivered to customers
Employing kanban/signal control the supply chain, kukuha
kung ilan yung need pull system
JIT
Traditional
Single
souring Multiple sourcing/supplier
agreement
Small inventory, WIP
Large inventory
Pull system
Push system
Design
standard Design custom output
output
Goal is zero defect
Excess capacity just in
case problem arises
Short lead time
Long lead times
Focus on controllin
Focus on planning
Lean Manufacturing
Customers POV

externally

focused

on

customer,

Total Quality Management approach to continuous

improvement that focuses in serving customer quality over
quantity kaizen Goal is zero defects

Quality Costs - costs associated with preventing, detecting, and

remediating product issues related to quality.
Conformance Costs keep
Non-conformance costs
defective products fall in the hands
has defects even prevented
of customers
Internal
failure

Prevention costs reduces #

discovered during inspection
of defects incurred prior to
rework
External failure defective
production
Appraisal costs inspection, if
product
is
delivered
to
meet
quality
standard

customer
expenses form operation to
delivery

Process Reengineering redesigning of inefficient business

process
Objective:
Simplification of business process
Elimination of non-value added activities
Cost reduction
Balanced Scorecard

Considers both internal/external variables

Includes financial and non-financial measure

Measurement/calculation tool to study business

PERSPECTIVE
Financial
Profit, revenue, cost, volume
performance
Internal
Quality, operation
Operation
Customer
Customer
claims,
concern,
Perspective
market share
Innovation
and Employee injury, retention
Learning

Every
1.
2.
3.

system has its weakest link/chain:

Identify the constraints
Provide effort to improve
Minimizing the efficiency of process at most critical path

Considers both internal/external variables

Includes financial and non-financial measure
Measurement/calculation tool to study business

Six Sigma process improvement method relying on

customer feedback and fact-based data gathering and analysis
to drive process improvement

GROWTH change in the volume using price of base year

PRICE RECOVERY change in price using units of
budgeted input/output
PRODUCTIVITY actual units compared to budgeted units
using current price

Theory of Constraints/bottlenecks/oiled wheel approach

key to success is improvement/effective management of
constraints
*constraints prevent an individual or organization from
achieving higher performance relative to its goal

Standard Costing

a method of cost control that includes a

measure of actual performance and a
measure of the difference, or variance,
between
standard
and
actual
performance

Relevant Costing

Absorption Costing
Full Costing Method
Variable Costing
Marginal Costing
Direct Costing

Absorption Costing
Full Costing Method
Variable Costing
Marginal Costing
Direct Costing

Budgeting
- It is a versatile

tool and has helped

managers cope with many problems

including inflation.

Contemporary
Management Styles

Contemporary
Management Styles