Week 6 Discussion
Explain the following:
- The comparative advantages and disadvantages of ideal versus normal standards.
- The factors that should be included in setting the price and quantity standards for direct materials, direct labor, and manufacturing overhead.
Week 6 Discussion
Types of cost standards and factors behind setting them
The term ideal standards mean those standards which are only possible in the most perfect working conditions since it’s an unrealistic approach to eliminating normal inefficiencies like machinery breakdown, workers’ rest hours, and so on (Drury, 2018, p.45). The advantages of this standard are: that workers are pushed towards giving their best, their understanding of responsibility is increased, and total quality management is encouraged. The disadvantage of this type of ideal standard is that is it highly impractical to achieve and it can reduce the performance efficiency due to divergence from the set standards.
The other type of cost standard is the normal cost standard which takes into consideration the normal inefficiencies and aims for setting reasonable and achievable standards. The advantages of this type of standard are: it is achievable although challenging, and divergence here is really low in comparison to ideal standards. While the disadvantage of normal standards is that they are realistic and easily attainable. On comparing the two types of standards the better out of the two is the normal standard since ideal standards are not so practical to establish.
The factors that should be considered while setting price and quantity for direct materials, direct labor, and manufacturing overhead are as follows:
Material price is affected by factors like cash discounts, quality of materials, and delivery methods.
Materials quantity is affected by factors like faulty machinery, inexperienced workers, most economical size, shape and quality of the materials, etc (Maheshwari, Maheshwari & Maheshwari, 2021, p.49).
Labor price is affected by paying different wages, misallocation of workers, health and life insurance schemes, compensation policies for workers, etc.
Overhead price is affected by factors like the rent of the production building, salaries of management, etc.
Drury, C. (2018). Cost and management accounting. Cengage Learning.
Maheshwari, S. N., Maheshwari, S. K., & Maheshwari, M. S. K. (2021). Principles of Management Accounting. Sultan Chand & Sons.