Question

Variances are the difference between standards and the actual results. How are the standard costs developed? What are the ideal practical standards? Which is better. Please provide an example

Answer 1

How standard costs developed?

Standard costs are developed on the basis of previous experience and company's norms.

Standard costs are the expected cost of the product before production. It is a controlling tool.

At the time of calculating standard cost of a product, standard cost for material ,direct labor and standard overhead to be calculated. The total of these three factors formulate standard cost of the product .

What are the ideal practical standards ?

Ideal standards:

It is very challenging and almost impossible to achieve because it doesn't consider normal wastage, machine breakdown , rest intervals of the workers etc.

It specks about maximum productivity of the labor and machine in the factory.

In reality without consideration of normal loss if standard are set then , after actual production it shows a large deviations. Employees are demotivated with this standards .

It is basically not implemented in real circumstances.

Practical standards:

It is comparatively less challenging and achievable . It considers the normal wastage, machine breakdown , rest intervals of the workers etc .

Almost every company's use practical standards for controlling functions because it consider factors of reality. It is achievable in present circumstances which work as a motivational force for the employees .

It is better than ideal standards for implementation in reality . Ideal standards is just an outline for implementation of standard costing in reality in any organization.