Standard cost for Direct Material | Meaning | Fixed standards
What is Standard cost for direct material?
Direct material means a material used for manufacturing and forming a major portion of a product. A cost is predetermined for the direct material i.e. Standard Cost for Direct Material.
Standards fixed for direct material
The following are the three important standards fixed for direct material:
- Quality standard;
- Quantity standard;
- Price standard.
1. Quality Standard. It is a technical work. The past experience in the using of material can be taken as base. It would be more advantageous to have detailed investigation in this regard.
2. Quantity Standard: The quantity of materials required for producing a product is decided by the engineering department. The engineering department uses historical records and an allowance for changing conditions will also be given for setting standards. Moreover, the following factors are considered while setting quantity standard for material.
- Past experience i.e. historical data.
- Technical estimates.
- Test runs and experiments.
- Standard bill of materials.
- Normal wastage.
- Scrap.
- Spoilage.
- Leakage.
- Shrinkage.
- Mishandling of material by labour.
An average usage of material can be taken into account from the past experience and avoid the period which was abnormal. Sometimes, the trend is using of materials is find out. Technical estimates is based on mathematical or scientific computation and engineering specifications. Different test runs may be undertaken on different days and under different situations. The average of these results should be used as a tool for setting material quantity standards.
The labour should be very cautious in order to avoid or reduce wastage, delays, shrinkage and spoilage. Standard bill of material is the list of materials used for manufacturing a product. A standard procedure is followed for issuing the materials for production on the basis of standard bill of materials.
3. Price Standard: Generally, the price standard is fixed in consultation with the purchase department. Hence, the factors like past market price, current market price, past experience of the purchase manager, quality of the material, demand and supply of the material, trade discount and quantity discount available, minimum and maximum level for various materials, purchasing policy of the company, means of transport used and the like are taken into consideration while fixing the price standard. Moreover, the expected future price changes should be anticipated while setting up price standard.
The responsible officer can collect the information like the price standard of the similar concern to fix price standard. Market research and statistical surveys are useful to the management to find the buying efficiency and taking the materials at competitive price.
