Rayong factory of the Simple Shoes Company Essay

Rayong factory of the Simple Shoes Company - Essay Example A Distinguish between basic, ideal and attainable standards and explain how these may be used in the Rayong factory of the Simple Shoes Company. Standard cost is the pre-determined operating cost calculated from Management’s standards of efficient operation and the relevant necessary expenditure. It is used as a basis for price fixation and cost control through variance analysis.Basically, standard cost reflects;oQuantities of material and labor expected to be used;oPrices expected to be paid for materials and labor during the coming year, and,oFactory expenses applicable to production based on efficient performance and practical capacity operation of the factory.Standard costs are used in the following applications:o Planning & Control: Standards provide a benchmark, which serves two purposes – guiding and directing the activities of the firm (planning) and analyzing whether the actual activities are in proper direction (control).oPricing Decisions: Standard cost facil itates decisions as also in decisions involving submission of quotations, replying to tenders etc. Since cost is pre-determined based on acceptable standards efficiency, decision making process is simplified.oVariance Analysis: Identification and measurement of variances from standards is possible with the use of standard costs, with a view to improve performance or to revise standards, whichever is applicable. Management by Exception: By analyzing the variances, the decision maker can focus on significant deviations from standards and take corrective actions. Managers can concentrate on critical areas of activity where variances are reported. Thus, standard costs facilitate control by exception (Accounting Tools 2008). Characteristics of basic standards (AccountingCoach 2008) Particulars Characteristics Period These standards reflect the costs that would have been incurred in a certain past period (i.e. the base period). Change These standards are used for items or costs which are likely to remain constant over a long period. Short run vs. Long run Basic standards are set on a long term basis and are seldom revised. Effect These costs relate to a base year, which is chosen for comparison purposes, like price indices etc. Basic standards do not represent what should be attained in the present period. Suitability Suited only to businesses having a small range of products and long production runs. Comparison of ideal standards and attainable standards (Accountingformanagemt.com 2009) Particulars Ideal Standards Attainable Standards Conditions These represent the level of performance attainable with the ‘best’ or ‘ideal set-up’, i.e. best quality materials at favorable prices, highly skilled labor, best equipments and layout. These represent the level of performance attainable under normal operating conditions, i.e. normal efficiency, normal sales/production volume etc. Efficiency These standards focus on maximum efficiency in utilization of resources, i.e. maximum output with minimum cost These standards focus on the practical attainable efficiency, after considering normal imperfections, i.e. optimization (not minimization) of cost per unit. Attainment These are generally not attainable; hence such standards may not be taken seriously. These are attainable with reasonable effort and hence constitute a good benchmark for control. Disposition o f variances Variances from the ideals would not indicate the extent to which they could have been reasonably and practically avoided. There is no logical method of disposing these variances. Here, variances are deviations from normal expectations. Hence they are disposed on the basis of the policy of the company in this regard. How these may be used in the Rayong factory of the Simple Shoes Company As is obvious from what has been discussed above a basic standard is more of a historical piece of information without much practical relevance for a new set up. Thus, it is advisable that no effort should be spent on setting up basic standards. Instead it would be much more effective if the