Overview
A performance standard in the realm of cost accounting, particularly in the methodology of standard costing, signifies a benchmark level of achievement designated for a specific period. This is an essential component for determining standard costs and evaluating performance against a set standard. For instance, if a task must be completed within two standard hours of direct labor at a predetermined rate per hour, this performance can then be used to calculate the standard direct labor cost of the task.
Examples
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Direct Labor Standards:
- A manufacturer determines that assembling one unit of a product should take four labor hours. Each labor hour is valued at $15. Therefore, the standard direct labor cost for one unit is $60.
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Material Usage Standards:
- A baked goods company expects that producing 100 loaves of bread will use up 50 kilograms of flour. The rate for a kilogram of flour is $2, making the standard material cost for 100 loaves $100.
Frequently Asked Questions (FAQs)
Q: What is the purpose of setting performance standards in standard costing?
- A: Performance standards serve to establish a baseline for measuring production efficiency and cost management. These metrics enable organizations to identify variances between actual and expected performance and take corrective actions.
Q: How are performance standards determined?
- A: Performance standards are usually determined based on historical data analysis, industry benchmarks, engineering studies, and management expectations.
Q: What is the impact of not meeting performance standards in an organization?
- A: Falling short of performance standards can highlight inefficiencies, cost overruns, and potential issues in processes that need to be addressed to improve overall productivity.
Q: Can performance standards change over time?
- A: Yes, performance standards can and should be updated based on continuous improvement programs, advancements in technology, changes in labor skills, and other relevant factors.
Related Terms
- Standard Costing: An accounting method that assigns fixed costs to production processes and measures differences from these standards to determine variances.
- Rate per Standard Hour: The predetermined cost attributed to one hour of labor or machine time.
- Standard Direct Labor Cost: The cost calculated by multiplying the standard hours required for a task by the rate per standard hour.
- Variance Analysis: The process of investigating discrepancies between actual performance and standard performance.
Online References
- Investopedia: Standard Costing
- AccountingTools: Performance Standards
- My Accounting Course: Standard Costing
Suggested Books for Further Studies
- Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- Management and Cost Accounting by Colin Drury
- Cost Accounting: Principles and Applications by Horace R. Brock and Herbert L. White
Accounting Basics: “Performance Standard” Fundamentals Quiz
### Are performance standards fixed, or can they be adjusted over time?
- [ ] Performance standards are fixed and cannot be adjusted.
- [x] Performance standards can be adjusted over time.
- [ ] Performance standards change quarterly by themselves.
- [ ] Performance standards fluctuate based on market conditions.
> **Explanation:** Performance standards can be adjusted over time based on new information, continuous improvement efforts, and changes in operating circumstances.
### What primary purpose do performance standards serve in accounting?
- [x] Establish a benchmark for measuring efficiency and performance.
- [ ] Set minimum sales targets.
- [ ] Determine the company's stock price.
- [ ] Evaluate the effectiveness of marketing campaigns.
> **Explanation:** The primary purpose of performance standards in accounting is to establish a benchmark against which efficiency and actual performance can be measured.
### What does "standard direct labor cost" typically include?
- [ ] Only materials used in production.
- [ ] Overhead costs.
- [x] Labor hours multiplied by the rate per standard hour.
- [ ] Employee benefits.
> **Explanation:** Standard direct labor cost is calculated by multiplying the standard number of labor hours required to complete a task by the rate per standard hour of labor.
### If the standard performance for a task is set at four labor hours but is completed in six labor hours, what does this indicate?
- [ ] Overachievement.
- [ ] Excess inventory.
- [x] A variance indicating inefficiency.
- [ ] Lower production costs.
> **Explanation:** If a task takes longer than the standard performance time, it indicates a negative variance, suggesting inefficiency and potential areas for improvement.
### How are performance standards typically established?
- [x] Based on historical data, industry benchmarks, and management expectations.
- [ ] Randomly chosen by the management.
- [ ] Reflect the market price of goods.
- [ ] Based on competitors' pricing strategies.
> **Explanation:** Performance standards are typically based on historical data, industry benchmarks, management expectations, and sometimes engineering studies.
### What happens when there is a significant variance between actual and standard performance?
- [ ] Nothing; it is part of the business routine.
- [ ] Salaries are adjusted based on this variance.
- [ ] Employees are penalized automatically.
- [x] The variance is analyzed to identify inefficiencies or issues.
> **Explanation:** Significant variances between actual and standard performance are analyzed to uncover inefficiencies or issues that need corrective action.
### Which of the following best describes the term "rate per standard hour"?
- [ ] The actual hourly wage paid to employees.
- [ ] Variable costs per hour.
- [x] The predetermined cost attributed to one hour of labor or machine time.
- [ ] Total production cost per hour.
> **Explanation:** The "rate per standard hour" is a predetermined cost that is attributed to one hour of labor or machine time based on standard costing.
### What kind of variances might result from discrepancies between standard and actual performance?
- [x] Positive or negative variances.
- [ ] Revenue surpluses.
- [ ] Customer dissatisfaction metrics.
- [ ] Inventory shrinkage.
> **Explanation:** Discrepancies between standard and actual performance result in either positive or negative variances, which are analyzed to manage efficiency and cost control.
### In what type of industry or sector is standard costing commonly used?
- [ ] Retail.
- [ ] Service sectors.
- [ ] Financial services.
- [x] Manufacturing.
> **Explanation:** Standard costing is commonly used in the manufacturing sector where it is important to control production costs and measure efficiency systematically.
### Why is it important to update performance standards regularly?
- [ ] To ensure constant wage adjustments.
- [ ] To gain an upper hand in market speculation.
- [ ] To reduce the overall cost of raw materials.
- [x] To reflect current operating conditions and continuous improvement efforts.
> **Explanation:** Regularly updating performance standards is important to keep pace with current operating conditions and embrace continuous improvement efforts in processes and efficiency.
Thank you for delving into our detailed examination of performance standards in accounting! Continue enhancing your financial acumen and tackling new challenges in your accounting journey!
