(31).---SETTING STANDARDS FOR MATERIAL COSTS-LABOUR COSTS.

Setting Standards For Materials Costs.

Direct material prices will be estimated by the purchasing department from their knowledge of the following

• Purchase contracts already agreed.
• Pricing discussions with regular suppliers.
• Quotations & estimates form potential suppliers.
• The forecasts movement of prices in the market.
• The availability of bulk purchase discounts.
• Material quality required.

Price inflation can cause difficulties in setting realistic standard prices,

(a)-If the current price were used in the standard, the reported price variance would become adverse as soon as prices go up, which might be very early in the year. If prices go up gradually rather than in one big jump, it would be difficult to select an appropriate time for revising the standard.

(b)-If an estimated mid year price were used, price variance should be favourable.In the first half of the year and adverse in the second half again assuming that price go up gradually.

Standard costing for material is therefore more diffcult in times of inflation but it is still worthwhile.

• Usage & efficiency variances will still be meaningful.
• Inflation is measurable; there is no reason why its effects cannot be removed from the variances reported.
• Standard costs can be revised, so long as this is not done too frequently.

Setting Standards For Labour Costs.

Direct labour rates per hour will be set by discussion with the personal department & by reference to the payrool & to any agreements on pay rises &/or bonuses with trade union representatives of the employees.

(a)-A separate hourly rate or weekly wage will be set for each different labour grade/type of employee.

(b)-An average hourly rate will be applied for each grade ( even though individual rates of pay may vary according to age & experiance).

Setting Standards For Material Usage & Labour Efficiency.

To estimate the materials required to make each product ( material usage) & also the labour hours required ( labour efficiency ), technical specifications must be prepared for each product by production experts.

( Either in the production department or the work study department) Material usage & labour efficiency standards are known as performance standards.

• The standard product specification for materials must list the quantities must be made known to the operators in the production department ( so that control action by management to deal with excess material wastage will be understood by them)
• The standard operation sheet for labour will specify the expected hours required by each grade of labour in each department to make one unit of product. These standard times must be carefully set & must be understood by the labour force. Where necessary , standard procedures or operating methods should be started.