<p>Transcript T7M1</p><p>Slide 1</p><p>What is a standard? Standards are benchmarks. They are the norm. They are what you measure actual results against. Let me say that again…it is what you measure against. The goal is for your actual performance to be LESS THAN the standard. For manufacturing and service organizations there are quantity standards and cost standards that are measured against. Ever wonder how the garage can give you such a close estimate for the work you need done on your car? Or how they have a good idea on how much time it will take to get the repair completed? Well they have standard times determined for repairing certain mechanical problems. If you need the oil changed it should take X amount of time. If you need your fan belt replace it should take Y amount of time. If you need the fuel pump replaced it should Z amount of time. I think you get the idea. And once you know how much time it will take it is a simple calculation for labor plus parts.</p><p>Managers use standards to know when a part of the process is working sub par. If the actual activities of the system are significantly different from the standards set by management it prompts an investigation into that area. This is called management by exception. Only those areas that are below standards gets management attention. If an area is running smoothly there is no reason to spend time reviewing that part of the system.</p><p>Slide 2</p><p>Who uses standard costs? Management. As mentioned previously, when a part of the system falls below standards set for its area then management investigates to determine the problem and fix it. </p><p>There are two main types of standards: ideal and practical. Ideal standards are virtually unattainable. The moon and sun have to be aligned perfectly with the other planets before that standard can be achieved. This can have de-motivating effects on employees. “If it can’t be met why try?” is what some think. However with Total Quality Management the ideal is always the goal and it doesn’t matter that it is near impossible to achieve. In TQM it is the journey not the destination that is important. </p><p>Practical standards are those standards that can be achieved although not easily. There are allowances for normal problems such as breakdowns, employee sickness or turnover, and waste. Which standard type your organization employees is a philosophical decision. Neither is right or wrong.</p><p>Slide 3</p><p>In the following section we will conduct variance analysis. Variance analysis compares actual results with standards. There are three types of variance analysis we will execute: direct material variance analysis, direct labor variance analysis and variable manufacturing overhead analysis. Before we move to the next section let us look at what needs to be included in the standards. For instance, direct material standards have price standards and quantity standards. Price standard includes the price plus freight in and any discounts taken. Quantity standard includes the material required per finished goods unit as well as the allowance for waste and spoilage or rejection of inferior materials. </p><p>Slide 4</p><p>Direct labor standards include rate standards and standard hours. Rate being the wage paid per hour and standard hours the time required to complete a unit of finished goods. The standard hours can be very difficult to determine particularly when several individuals work on the same unit as it moves through assembly.</p><p>Slide 5</p><p>Variable Manufacturing overhead standards often look a lot like direct labor standards. Why? Because variable overhead is often applied based upon direct labor hours. The variable overhead standard rate is a the variable portion of the predetermined overhead rate that we calculated in topic three. As you might suspect with overhead, it is the most confusing variance analysis of the three.</p>