How the standard cost system can be used for product costing and inventory valuation
Forthe inventory valuation, overhead costs, labor and actual materialsare added to the inventory. The inventory is reduced by estimatingstandard costs of products whenever goods are sold. Then each yearthe independent auditors conducts a physical inventory count and thenthe physical inventory is valued by using same standard costs usedwhen computing the cost of goods sold (Heuvel, & Wagelmans,2002). However, the auditor’s inventory value is usually less thanthe carton medical devices inventory by 10-15% but on severaloccasions the inventory value is higher physically. Such discrepancymay be caused by poor record keeping, theft or scrap.
The efficiencies that can be obtained:
Itis accurate to 1% to yearly physical inventory counts and it reducedthe errors of year- end inventory. Thus the CMD is assured the costsystem is accurate.
Inaddition, the standard cost is accurate and the accountants canrealize that addition of actual costs to the inventory andsubtracting the standard costs when the units have been sold.
Parts production department: it will be able to produce more connecters
Machining department: it will be able to produces more machined metal parts for the finished medical devices
Fabrication departmernt: production of more stamped metal parts for housing
Circuit bard assembly: can produce or buy more more electrinic tools in large quantities
Subassemblies department will be able to buy more small tools of mechanical and electronics
Refurbish ands eework department: this department can repair devices returned by customers in time and efficiently at no cost depending on the waranty
Use of Cartons standard cost system in product costing for cost analysis
Inthis system the standards for quantity of material for each part ismaintained in addition to labor standards. In this case the standardcost system calculated the standard material costs and standard laborhours though the following formula where the IE denotes IndustrialEngineering
Thestandard labor costs are also calculated as follows
The intelligence that management is likely to gain using this approach
Throughuse of this approach the management will simplify the productionoperations. Through the use of this approach, when a line gets shortof the parts, the additional parts will be requested withoutreferring to the shop order. Also through this system, the inventoryof extra parts is maintained to smoothen the work flow. Thus monthlymaterial usage variance is computed by the production line instead ofthe production order. The variance to be computed includes
Material usage variance will assume material in production is equal to number of units multiplied standard of costs
Scrapped labor variance: excess material recorded in (a) above includes labor dollars
Scrapped overhead variance when material is scrapped the overhead is also scrapped
Labor rate variance it is the difference between the standard cost of worked hours and the actual wages paid
Labor efficiency variance it will be assumed that all units on production line is 50% complete to standard labor hours
Costs of excess overhead it is overhead associated with the labor efficiency
Overhead spending and volume variance
Heuvel,W. v., & Wagelmans, A. P. (2002). Anote on ending inventory valuation in multiperiod productionscheduling.Amsterdam: Tinbergen Institute.