Setting Standards For Overheads , Selling Price & Margin.
Setting Standards For Overheads.
The standard overhead absorption rate is the same as the predetermined overhead absorption rate as calculated for an absorption costing system.
The standard absorption rate will depend on the planned production volume for a period. Production volume will depend on two (2) factors,
- Production capacity ( or volume capacity) measured perhaps in standard hours of output.
- Efficiency of working , by labour or machines , allowing for rest time & contingency allowances. This will depend on the type of performance standard to be used ( ideal,current,attainable & so on).
Capacity levels.
Capacity levels are needed to establish a standard absorption rate for production overhead, when standard absorption costing is used. Any one of three (3) capacity levels might be used for budgeting.
- Full capacity is the theoretical capacity, assuming continuous production without any stopages due to factor such as machine down time, supply shortages. Full capacity would be associated with ideal standards.
- Practical capacity acknowledge that some stopages are unavoidable such as maintains time for machines, & resetting time between jobs, some mechine breakdowns & so on practical capacity is below full capacity , & would be associated with attainable standards.
- Budgeted capacity is the capacity ( labour hours, machine hours) needed to produce the budgeted output, & would be associated with current standard which relate to current conditions but may not be representative of normal practical capacity over a longer period of time.
Setting Standards For Selling Price & Margin.
The standard selling price will depend on a number of factors including the following,
- Anticipated market demand,
- Competing products & competitors "actions",
- Manufacturing costs,
- Inflation estimates.
The standard sales margins is the difference between the standard cost & the standard selling price.
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