Managerial Accounting Chapter 10: Standard Costing

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Questions and Answers

What is the primary distinction between standards and budgets?

Standards are variable costs, whereas budgets are fixed costs.

Standards represent unit costs, while budgets reflect total costs. (correct)

Standards are used for total costs, while budgets set costs per unit.

Standards are set by management, while budgets are set by employees.

Why are price and quantity standards determined separately?

The purchasing manager and production manager work at the same time.

Quantity standards are irrelevant to price setting.

Different managerial roles are involved in their determination. (correct)

They are both driven by the same purchasing strategy.

In establishing direct labor standards, which factor is most critical?

The average efficiency rate of employees. (correct)

The anticipated market changes impacting labor costs.

The cost of materials needed for production.

The historical costs of labor in previous projects.

What is a primary function of variable overhead standards?

To allocate costs associated with indirect production activities. Signup and view all the answers

Which statement regarding direct material standards is accurate?

They include both price and quantity considerations. Signup and view all the answers

What type of standards should be set to reflect achievable efficiency?

Attainable Standards Signup and view all the answers

Which of the following best describes standard labor rates?

A fixed rate reflecting the mix of wages earned Signup and view all the answers

What is used to set the quantity standards for variable overhead?

The activity in the allocation base Signup and view all the answers

The standard cost card for a product typically summarizes which of the following?

Standard quantities and standard prices Signup and view all the answers

What does the standard price per unit for direct materials typically represent?

The final delivered cost of materials net of discounts Signup and view all the answers

In setting labor standards, which method is often used to determine the standard hours?

Time and motion studies Signup and view all the answers

What is the formula to calculate Materials Price Variance?

Actual Price - Standard Price Signup and view all the answers

Which standard should a company avoid using when setting quality expectations?

Ideal Standards Signup and view all the answers

Which statement best distinguishes standards from budgets?

Standards are measurable goals for performance, while budgets are financial plans. Signup and view all the answers

Which of the following describes the Materials Quantity Variance?

Difference between actual quantity used and standard quantity allowed Signup and view all the answers

In variance analysis, what is the primary focus for materials?

Price and quantity variances Signup and view all the answers

When calculating the Spending Variance, which elements are included?

Direct materials and variable overhead usage Signup and view all the answers

What does 'actual quantity' refer to in the context of variance analysis?

Amount of resources actually consumed Signup and view all the answers

How does a budget fundamentally differ from standard costs?

Budgets forecast cash flow while standards measure performance Signup and view all the answers

What is included when setting direct labor standards?

Time required for tasks and productivity levels Signup and view all the answers

Which of the following is NOT a component of variable overhead standards?

Fixed cost variance Signup and view all the answers

Study Notes

Chapter 10: Standard Costing

Standard costing is a managerial control tool
Standards are benchmarks or "norms" for performance measurement
Two main types of standards: Quantity standards and Cost (price) standards
Quantity standards detail the amount of input needed to create a product or service
Cost (price) standards indicate the cost of each input unit
Developing standards improves control
Determining unit standard costs requires quantity and pricing decisions
Quantity standard × Price standard = Standard cost per unit
Significant deviations from standards are brought to management's attention (management by exception)
This applies to direct labor, direct materials, and manufacturing overhead
The variance analysis cycle includes identifying questions, receiving explanations, taking corrective actions, analyzing variances, preparing standard cost performance reports, and conducting the next period's operations
Accountants, engineers, purchasing agents, and production managers work together to establish standards for efficient future production
The decisions made are informed by historical experience, engineering studies, and input from operating personnel
Currently attainable standards are preferable over ideal standards (which require 100% peak efficiency)
Currently attainable standards are achievable through reasonable and efficient effort
Standard price per unit for direct materials represents the final delivered cost, net of discounts
Standard cost for direct materials is summarized in a bill of materials
Standard direct labor rate per hour often reflects a mix of wages
Time and motion studies are used to determine standard labor hours per unit
Variable overhead standards use a predetermined overhead rate
Variable overhead's quantity standard is the activity in the allocation basis used to calculate the predetermined overhead
A standard cost card for one product unit includes Quantity or Hours, Price or Rate, and Standard Cost per Unit
Standard cost cards list direct materials, direct labor, and variable manufacturing overhead
Standards are different from budgets, wherein standards focus on per-unit costs, while budgets look at total costs
Purchase and usage activities occur at different times, leading to separate price and quantity standards for materials
Variance analysis breaks down the difference between actual and standard costs into price and quantity variances, finally leading to a spending variance. There are variances for material, labor, and variable overhead.

Price and Quantity Standards

Purchasing managers handle raw material prices
Production managers control raw material quantities
Raw materials are sometimes held in inventory before use

Variance Analysis

Variance Analysis identifies the differences between actual costs and standard costs
Price variance is the difference between actual price and standard price
Quantity variance is the difference between actual quantity and standard quantity

A General Model for Variance Analysis

Actual quantity is the amount of direct materials, labor, and variable manufacturing overhead used in production
Actual price is the amount spent on inputs
Standard price is the expected cost of inputs
Standard quantity is the standard amount allocated for the period's actual output

Favourable and Unfavorable Variances

Favorable: Actual price (AP) is less than Standard Price (SP) or Actual Quantity (AQ) is less than Standard Quantity (SQ)
Unfavorable: Actual price (AP) is more than Standard Price (SP) or Actual Quantity (AQ) is more than Standard Quantity (SQ)

Responsibility for Material Variances

Production managers are responsible for material quantity variances
Purchasing managers are responsible for material price variances

Responsibility for Variances (Price and Usage)

Quality, quantity discounts, and source distance affect price variances
Scrap, waste, and rework impact usage variance

Quick Check

Specific examples of calculations are given

Direct Labor Variances

Labor Rate Variance (LRV) calculates the difference between what was paid and what should have been paid given the actual output
Labor Efficiency Variance (LEV) measures the difference between actual and standard labor hours at the standard rate
Total Labor Variance combines rate and efficiency variances

Analysis of Labor Variances

Labor rates are influenced by external forces (e.g., labor markets, union contracts)
More skilled workers used for less skilled tasks, and unexpected overtime, may impact labor rates
Production managers are primarily responsible for labor efficiency

Overhead Variances

Unfavorable variances equal underapplied overhead
Favorable variances equal overapplied overhead
The sum of overhead variances equals the under- or overapplied overhead cost.

Theoretical vs. Practical Capacity

Theoretical Capacity represents the maximum production if everything runs without issue
Practical Capacity considers unavoidable downtime

Variance Analysis and Management by Exception

Larger variances (dollar amount or percentage of standard) are investigated first
Statistical control charts show whether variances are outside usual parameters for review

Advantages of Standard Costs

Management by exception
Promotes economy and efficiency
Simplified bookkeeping
Enhanced responsibility accounting

Potential Problems with Standard Costs

Emphasizing standards may exclude other important objectives
Favorable variances may be misinterpreted
Standard cost reports may not be timely
Invalid assumptions about the relationship between labor cost and output
Continuous improvement may be more important than meeting standards

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Description

This quiz covers Chapter 10 of Managerial Accounting, focusing on standard costing as a managerial control tool. It discusses the importance of quantity and cost standards, variance analysis, and management by exception. Test your understanding of how standard costing improves performance measurement and control in operations.