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Questions and Answers
Standards are developed for each factor of production [materials, labor, and overhead] based on accounting, engineering, or statistical quality control studies and usually fit into one of the two [2] broad categories. Which of the following categories are the two?
Standards are developed for each factor of production [materials, labor, and overhead] based on accounting, engineering, or statistical quality control studies and usually fit into one of the two [2] broad categories. Which of the following categories are the two?
- ESTABLISHED Standards and APPROVED Standards
- HISTORICAL Standards and CURRENT STANDARDS
- IDEAL/THEORETICAL Standards and CURRENTLY ATTAINABLE/PRACTICAL Standards (correct)
- FLEXIBLE Standards and BUDGETED Standards
Standards based on historical information are used for employee motivation, product costing, and budgeting.
Standards based on historical information are used for employee motivation, product costing, and budgeting.
False (B)
Standard costs are systematically predetermined costs established by management to be used as a basis for comparison with actual cost. What is the formula for Variance analysis?
Standard costs are systematically predetermined costs established by management to be used as a basis for comparison with actual cost. What is the formula for Variance analysis?
- Variance = (Budgeted Costs/Actual Costs) - 1
- Variance = Actual Costs - Standard Costs (correct)
- Variance = (Actual Costs/Budgeted Costs) - 1
- Variance = Standard Costs - Actual Costs
Flashcards
Standard Costs
Standard Costs
Predetermined costs set by management for various purposes like costing, pricing, and performance measurement.
Ideal/Theoretical Standards
Ideal/Theoretical Standards
Standards based on perfect efficiency and 100% capacity, not practical for control.
Currently Attainable/Practical Standards
Currently Attainable/Practical Standards
Standards based on high efficiency, achievable, useful for motivation and budgeting.
Standard Cost Variance
Standard Cost Variance
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Favorable Variance
Favorable Variance
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Unfavorable Variance
Unfavorable Variance
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Material Variance (DM)
Material Variance (DM)
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Materials Quantity Variance (MQV)
Materials Quantity Variance (MQV)
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Materials Price Variance (MPV)
Materials Price Variance (MPV)
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Labor Efficiency Variance (LEV)
Labor Efficiency Variance (LEV)
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Labor Rate Variance (LRV)
Labor Rate Variance (LRV)
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Study Notes
Standard Costing
- Standard costs are predetermined, targeted costs set by management for various purposes (costing, pricing, budgeting, cost control, and performance measurement).
- Standards are like budgeted amounts, but appear in ledger accounts. Budgets don't.
- A standard costing system is often ineffective without a flexible budgeting system.
- Standards can be ideal (theoretically perfect) or currently attainable (practically achievable). Historical standards are not used, as they could perpetuate inefficiencies.
- Used by service, nonprofit, and manufacturing organizations.
- Useful in process and job-order costing. Standards in manufacturing are broadly classified as quantity (raw materials or labor time per unit) and cost (peso amount of the quantity standard per unit of input).
Standard Cost Variance
- Standard costs are pre-determined costs used as a comparison to actual costs.
- Variance analysis explains the differences between standard and actual costs.
- Variance = Actual Costs - Standard Costs
- Favorable variance (AC < SC): credit balance
- Unfavorable variance (AC > SC): debit balance
- If variances are immaterial, write them off to cost of goods sold.
- Material/significant variances are allocated to work in process, finished goods, and cost of goods sold.
- Managers focus on results that significantly differ from expectations (management by exception).
Direct Material Variance
- Direct Material (DM) Variance = Actual Costs – Standard Costs = (AQ x AP) – (SQ x SP)
- AQ = Actual Quantity
- AP = Actual Price
- SQ = Standard Quantity
- SP = Standard Price
- Materials Quantity Variance (MQV) = (AQ – SQ) x SP
- Materials Price Variance (MPV) = AQ x (AP – SP)
Direct Labor Variance
- Direct Labor (DL) Variance = Actual Costs – Standard Costs = (AH x AR) – (SH x SR)
- AH = Actual Hours
- AR = Actual Rate
- SH = Standard Hours
- SR = Standard Rate
- Labor Rate Variance (LRV) = AH x (AR – SR)
- Labor Efficiency Variance (LEV) = (AH – SH) x SR
Factory Overhead (FOH) Variance
- FOH Variance = Actual FOH – Standard FOH
- 1-way variance analysis: Actual FOH – Budgeted FOH
- 2-way variance analysis:
- Controllable variance
- Volume variance
- 3-way variance analysis:
- Spending variance
- Efficiency variance
- Volume variance
- 4-way variance analysis
- Variable spending variance
- Fixed spending variance
- Variable efficiency variance
- Fixed volume variance
Gross Profit Variance Analysis
- Gross profit variance analysis assesses operational efficiency, ensuring gross profit covers expenses and generates profit.
- Gross Profit (GP) variance = Actual/Current GP – Budget/Previous GP.
- Favorable if Actual > Budget, and unfavorable if Actual < Budget .
- Price Factor: difference between actual and budgeted sales price.
- Cost Factor: difference between actual and budgeted cost of goods sold.
- Volume Factor: difference between actual and budgeted unit of goods sold.
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Description
Explore the essential concepts of standard costing and variance analysis. This quiz covers the importance of predetermined costs in budgeting and performance measurement, and details how variance analysis helps in understanding the discrepancies between standard and actual costs. Ideal for students studying accounting or management principles.
