MODULE 4 - 9 STANDARD COSTING

Questions and Answers

What is a standard cost system primarily used for?

To determine market demand

To measure the final cost of a product or service (correct)

To analyze employee performance

To measure actual sales revenue

Which of the following is NOT a principal use of standard costing?

Highlighting activities that are out of control

Establishing employee salaries (correct)

Measuring cost of production

Valuing inventories

What is referred to as a variance in standard costing?

The standard cost of a product

The difference between actual and standard costs (correct)

The actual cost of a product

The total production cost

In which production situations is standard costing most beneficial?

Mass production and repetitive assembly work Signup and view all the answers

What type of costing system can use standard costs?

Absorption and marginal costing systems Signup and view all the answers

What should be prepared by production experts to estimate the materials required for a product?

Technical specifications Signup and view all the answers

What does the process of variance analysis involve?

Comparing actual costs with predetermined estimates Signup and view all the answers

What is used to set the standard cost of direct labor for a unit of product?

Standard labor rate per hour multiplied by standard quantity of hours required Signup and view all the answers

Which of the following characterizes the nature of standard costs?

Standard costs are predetermined estimates of costs Signup and view all the answers

How often is the absorption rate of fixed production overheads typically predetermined?

Each year Signup and view all the answers

Which type of production is least likely to benefit from standard costing?

Job production with unique specifications Signup and view all the answers

Why must standard input quantities be made known to production operators?

For better management of material wastage Signup and view all the answers

What does the ‘standard operation sheet’ specify?

Expected hours required by each grade of labor Signup and view all the answers

What can be affected by inflation when setting labor standards?

Direct labor costs Signup and view all the answers

What must be discussed with the personnel department to set direct labor rates?

Payroll information and trade union agreements Signup and view all the answers

What must be carefully set and understood by the labor force for labor efficiency?

Standard procedures or operating methods Signup and view all the answers

What is a primary disadvantage of using ideal performance standards?

They may lead to adverse variances that demotivate employees. Signup and view all the answers

Which type of performance standard provides a realistic yet challenging target for employees?

Attainable standards Signup and view all the answers

How do current standards differ from attainable standards?

Current standards incorporate allowances for inefficiency. Signup and view all the answers

What are basic standards primarily used for?

As a benchmark for long-term performance measurement. Signup and view all the answers

What is one major factor that can complicate setting direct material price standards?

Volatility in market prices. Signup and view all the answers

Which type of performance standard is least likely to motivate employees over time?

Basic standards Signup and view all the answers

What is crucial for well-set current standards to be effective?

Employee involvement and consent. Signup and view all the answers

When setting standards based on historical data, what is a significant risk?

Incorporating past inefficiencies. Signup and view all the answers

What is the main issue with using the current price of materials when setting standard prices?

Prices do not consider future fluctuations. Signup and view all the answers

What characterizes attainable performance standards?

They encourage performance improvement over time. Signup and view all the answers

Which type of standard is often referred to as 'practical standards'?

Attainable standards Signup and view all the answers

What is one characteristic of ideal standards?

They exclude any possibility of inefficiency. Signup and view all the answers

What happens when prices of materials are expected to increase gradually?

Reported price variances fluctuate unfavorably during certain periods. Signup and view all the answers

How is the standard cost of direct labor calculated?

Standard labor rate per hour times standard quantity of hours required Signup and view all the answers

What is the role of technical specifications in product manufacturing?

To estimate the materials and labor required for production Signup and view all the answers

What is included in the 'standard operation sheet' for labor?

The expected hours required by each grade of labor to produce one unit Signup and view all the answers

How often are the absorption rates of fixed production overheads typically established?

Yearly when the budget is prepared Signup and view all the answers

What must be done to ensure that production operators understand the control actions for material wastage?

Standard input quantities must be made known to them Signup and view all the answers

What characteristic is important for setting standard procedures or operating methods?

They must be clearly stated and understandable by the labor force Signup and view all the answers

What are standard costs in a standard costing system primarily used for?

To value inventories and measure production costs Signup and view all the answers

Why might you encounter similar problems with inflation when setting labor standards?

Wage negotiations with unions may change based on inflation Signup and view all the answers

What is a likely consequence of not setting realistic standard times for labor?

Wasted resources and reduced productivity Signup and view all the answers

Which statement best describes a variance in standard costing?

The difference between actual and standard costs Signup and view all the answers

In which production scenario is standard costing considered most advantageous?

Mass production and repetitive assembly work Signup and view all the answers

What is the purpose of variance analysis in a standard costing system?

To identify areas requiring corrective actions Signup and view all the answers

Which of the following types of production is least likely to utilize standard costing effectively?

One-off customized production Signup and view all the answers

How are standard costs created in a standard costing system?

By establishing predetermined estimates of costs Signup and view all the answers

What is one critical factor for achieving the benefits of standard costing?

A degree of repetition in the production process Signup and view all the answers

Which costing system can utilize standard costs for financial analysis?

Absorption costing system Signup and view all the answers

What is a likely consequence of using ideal performance standards?

Frequent adverse variances leading to demotivation Signup and view all the answers

Attainable performance standards are characterized by which of the following?

They provide realistic but challenging targets for employee performance. Signup and view all the answers

What defines current performance standards?

They allow some level of inefficiency and wastage in the work process. Signup and view all the answers

Which type of performance standard is primarily used as a benchmark over time?

Basic standards Signup and view all the answers

What is a primary drawback of utilizing basic performance standards?

They become out of date and fail to motivate employees. Signup and view all the answers

How should a direct material price standard be estimated considering inflation?

Choose an average or estimated future price to reflect changes. Signup and view all the answers

Which of the following methods should be avoided when setting standards for new processes?

Using historical data that may incorporate past inefficiencies. Signup and view all the answers

Current standards require what key element for effectiveness?

Employee involvement in improving and understanding them Signup and view all the answers

What challenges can arise from using ideal performance standards in organizations?

They might lead to unachievable targets and demotivate staff. Signup and view all the answers

What is the main risk of setting standards based on historic data?

They may not allow for innovative working methods to emerge. Signup and view all the answers

What potential effect do ideal standards have on employee behavior over time?

They may lead to resignation and lack of effort if seen as unattainable. Signup and view all the answers

Why might setting a standard price based on new estimates be more effective?

It accommodates anticipated market changes more accurately. Signup and view all the answers

Which type of performance standard might fail to provide a motivational impact ultimately?

Ideal standards Signup and view all the answers

In what way can current performance standards be beneficial?

They promote cooperation among employees in performance improvement efforts. Signup and view all the answers

What role do production experts have in estimating labor hours for a product?

They prepare technical specifications for each product. Signup and view all the answers

How are standard labor rates per hour determined?

Through a collaborative discussion with the personnel department and trade unions. Signup and view all the answers

What is included in the standard operation sheet for labor?

The expected hours required by each grade of labor. Signup and view all the answers

What is the main purpose of standard input quantities being known to production operators?

To understand management's intentions for material control. Signup and view all the answers

When are the absorption rates for fixed production overheads typically predetermined?

Once, during the preparation of the annual budget. Signup and view all the answers

What complicates the process of setting direct material price standards?

Inflationary pressures affecting material costs. Signup and view all the answers

Which statement best describes the concept of 'absorbed costs' in standard costing?

Costs allocated based on standard selling prices and budgeted output. Signup and view all the answers

What should be prepared to list the quantities required per unit of each material for a product?

The standard product specification. Signup and view all the answers

What is the primary purpose of establishing standard costs in a standard costing system?

To establish predetermined measures against which actual performance can be compared Signup and view all the answers

How do variances impact a standard costing system?

They highlight areas needing management attention for corrective actions Signup and view all the answers

In which costing situation is standard costing primarily applicable?

Mass production with repetitive tasks Signup and view all the answers

What is the role of variance analysis in a standard costing system?

To examine the differences between actual and standard costs to identify discrepancies Signup and view all the answers

What factor primarily affects the effectiveness of standard costing systems?

The level of repetition in the production process Signup and view all the answers

Which characteristic best describes standard costs in absorption costing systems?

They include both direct and indirect costs of production Signup and view all the answers

What happens when a company fails to establish realistic performance standards?

Employees may become demotivated and performance may dwindle Signup and view all the answers

How are standard costs established within standard costing systems?

Using historical data alongside future production estimates and market conditions Signup and view all the answers

What are ideal standards based on?

Perfect operating conditions without any inefficiencies Signup and view all the answers

Which type of performance standard is described as providing a realistic yet challenging target for employees?

Attainable standards Signup and view all the answers

What is a disadvantage of using current performance standards?

They may not lead to improvements in efficiency Signup and view all the answers

What characterizes basic performance standards?

They remain unchanged for long periods Signup and view all the answers

When estimating costs for standard prices, which factor can complicate the process?

Predicting future price inflation Signup and view all the answers

What can be the psychological effect of reporting variances from ideal standards?

Feelings of unachievability and demotivation Signup and view all the answers

Which method can be used for setting standards when new working methods are introduced?

Engineering studies Signup and view all the answers

What is the impact of basic standards on employee motivation over time?

Promotes boredom and lack of challenge Signup and view all the answers

Which statement best describes attainable performance standards?

They represent realistic goals that are still challenging. Signup and view all the answers

What role do purchasing departments play in setting direct material price standards?

They estimate market trends and supplier pricing. Signup and view all the answers

What factor must be managed to ensure that effective standards are set?

Employee participation in standard setting Signup and view all the answers

In what scenario might a company use an average expected price when setting a standard price for materials?

When there is an anticipated increase in price over time Signup and view all the answers

What is a common outcome when using ideal performance standards?

Reporting of adverse variances Signup and view all the answers

Study Notes

Standard Cost Definition

A standard cost system uses predetermined costs of inputs and quantities to measure the final product or service cost.

Uses of Standard Costing

Primarily values inventories and assesses production costs for accounting.
Serves as a control device by establishing planned costs and using variance analysis to identify areas needing corrective action.

Standard Costing as a Control Technique

Variances are the differences between actual and standard costs.
Involves setting predetermined cost estimates, collecting actual costs, and comparing them.
Standard costing applies across various manufacturing situations, favoring batch, mass production, and repetitive assembly.

Setting Standards

Standard costs can be used in both absorption and marginal costing systems, but the focus here is on absorption costing.

Types of Performance Standards

Four categories exist: ideal, attainable, current, and basic.
Ideal standards may motivate efficiency but can lead to employee demotivation if perceived as unattainable.
Attainable standards provide realistic targets, fostering productivity without overwhelming employees.
Current standards adapt to existing conditions but do not push for efficiency improvements.
Basic standards serve as long-term benchmarks but may become outdated and less motivating over time.

Methods of Standard Setting

Standards must encompass both the physical quantity and cost of resources required for production.
Historic data can influence standards, but new methods may necessitate a recalculation of standards based on modern practices.

Direct Material Standards

Standard cost of direct material = standard price per unit x standard quantity required.
Estimated by the purchasing department based on contracts, supplier discussions, market forecasts, and bulk discounts.
Price volatility due to inflation complicates the establishment of realistic standard prices.

Direct Labour Standards

Standard cost of direct labour = standard labour rate per hour x standard hours required.
Labour rates determined through collaboration with personnel departments and reference to payroll agreements.
Technical specifications and ‘standard operation sheets’ outline expected hours required for each product.

Overhead Absorption Rates

Overhead costs are predetermined annually based on budgeted expenditures and production levels.
Standard costs in selling and distribution may be absorbed as a percentage of the standard selling price.
Marginal costing excludes elements of absorbed overhead costs.

Standard Cost Definition

A standard cost system uses predetermined costs of inputs and quantities to measure the final product or service cost.

Uses of Standard Costing

Primarily values inventories and assesses production costs for accounting.
Serves as a control device by establishing planned costs and using variance analysis to identify areas needing corrective action.

Standard Costing as a Control Technique

Variances are the differences between actual and standard costs.
Involves setting predetermined cost estimates, collecting actual costs, and comparing them.
Standard costing applies across various manufacturing situations, favoring batch, mass production, and repetitive assembly.

Setting Standards

Standard costs can be used in both absorption and marginal costing systems, but the focus here is on absorption costing.

Types of Performance Standards

Four categories exist: ideal, attainable, current, and basic.
Ideal standards may motivate efficiency but can lead to employee demotivation if perceived as unattainable.
Attainable standards provide realistic targets, fostering productivity without overwhelming employees.
Current standards adapt to existing conditions but do not push for efficiency improvements.
Basic standards serve as long-term benchmarks but may become outdated and less motivating over time.

Methods of Standard Setting

Standards must encompass both the physical quantity and cost of resources required for production.
Historic data can influence standards, but new methods may necessitate a recalculation of standards based on modern practices.

Direct Material Standards

Standard cost of direct material = standard price per unit x standard quantity required.
Estimated by the purchasing department based on contracts, supplier discussions, market forecasts, and bulk discounts.
Price volatility due to inflation complicates the establishment of realistic standard prices.

Direct Labour Standards

Standard cost of direct labor is calculated using the standard labor rate and required hours, guided by technical specifications.Overhead Absorption Rates
Overhead costs are predetermined annually based on budgeted expenditures and production levels.
Standard costs in selling and distribution may be absorbed as a percentage of the standard selling price.
Marginal costing excludes elements of absorbed overhead costs.

Standard Cost Definition

A standard cost system measures the final cost of a product or service using predetermined standard costs and standard quantities.

Uses of Standard Costing

Primarily used to value inventories and measure production costs for accounting.
Serves as a control device by establishing standards, allowing variance analysis to identify areas needing management attention.

Standard Costing as a Control Technique

Variances are differences between actual and standard costs.
It involves setting predetermined cost estimates, collecting actual costs, and comparing them against estimates.
Effective in batch and mass production, job production with standardized parts, and certain service industries.
Most beneficial in environments with repetitive production processes.

Setting Standards

Focus on absorption costing, applicable in both systems.Types of Performance Standards
Four types: ideal, attainable, current, and basic.

Ideal Standards

Based on perfect conditions with no waste or inefficiency.
Useful for identifying improvement opportunities but can demotivate employees due to perceived unattainability.

Attainable Standards

Reflect realistic operating conditions while promoting efficiency.
Provide motivation as they are challenging yet achievable.

Current Standards

Set based on existing operational efficiencies, allowing for some inefficiencies.
Offer psychological incentives for employees but do not aim for improved efficiency.

Basic Standards

Statistically long-term, may become outdated and less useful over time.
Serve as benchmarks for measuring performance changes over prolonged periods.

Methods of Standard Setting

Standards should be established for resource quantities and costs.
Can use historical data but might incorporate past inefficiencies.
New standards may require fresh analyses if working methods change.

Direct Material Standards

Calculated as standard price per unit multiplied by standard quantity per product.
Estimated by purchasing departments based on contracts, supplier discussions, market forecasts, and bulk discounts.
Price inflation complicates standard price setting; options include using current prices or expected average prices.

Direct Labour Standards

Calculated as the standard labour rate per hour multiplied by standard hours required.
Rates determined through discussions with personnel and using payroll data.
Must reflect different labour grades/types with average rates established, regardless of individual pay variances.

Overhead Absorption Rates

Fixed production overhead absorption rates are predetermined annually, based on budgeted expenditure and production.
Standard costs for selling and distribution may be absorbed as a percentage of standard selling prices.
Marginal costing does not include absorbed overheads in standard costs.

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Description

This quiz explores the concept of standard costing, including its definition and primary uses in cost accounting. Learn how standard costs are applied to value inventories, measure production costs, and serve as a control device in organizations. Test your knowledge on the fundamentals of standard cost systems.