Managers of FirstRate Company are engaged in the annual process of setting standard manufacturing costs for the company’s coming fiscal year. Several managers claim that standard costs are essential to effective planning and control because the company operates in an intensely competitive, dynamic, and technology-dependent industry. For each of the company’s products, this process arrives at per-unit price and usagestandards for direct materials, direct labor, and each category of manufacturing overhead used in making those products.
The company sets usage (efficiency) standards for direct material and certain categories of overhead in terms of physical quantities (volume, weight, or number of parts or components) required in manufacturing products. Management establishes usage standards for direct labor and the remaining categories of overhead in terms of required time (hours) to complete the related activities.
Discuss potential disadvantages or limitations of using a standard cost system.
Compare the relative merits of usage standards based on:
The company’s normal, expected conditions and experience, versus
Product engineers’ technical specifications for required materials and industrial engineers’ workplace studies of the time required to perform manufacturing activities.