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Questions and Answers
Which statement best describes a standard cost?
Which statement best describes a standard cost?
- It is the actual cost incurred in producing a product.
- It indicates the maximum price a company is willing to pay for materials.
- It represents the minimum cost that can be achieved in production.
- It is a benchmark used for planning and control purposes. (correct)
Which of the following is NOT a reason for using standard cost systems?
Which of the following is NOT a reason for using standard cost systems?
- Simplifying inventory valuation.
- Facilitating decision making with cost information.
- Increasing the complexity of cost traceability. (correct)
- Communicating management’s expectations.
What is the role of variance analysis in a standard cost system?
What is the role of variance analysis in a standard cost system?
- To estimate future quantities and costs based on historical data.
- To develop a new standard cost for product pricing.
- To establish upper and lower tolerance limits for all costs.
- To identify reasons for the differences between budgeted and actual costs. (correct)
Which group should be involved in the standard-setting process to ensure credibility?
Which group should be involved in the standard-setting process to ensure credibility?
Which statement accurately reflects why managers might prefer using standard costs?
Which statement accurately reflects why managers might prefer using standard costs?
What does the management by exception concept rely on in a standard cost system?
What does the management by exception concept rely on in a standard cost system?
Why is employee involvement in standard-setting important?
Why is employee involvement in standard-setting important?
What is the primary purpose of a standard cost system in cost control?
What is the primary purpose of a standard cost system in cost control?
What does a favorable material mix variance indicate?
What does a favorable material mix variance indicate?
What could be a reason for an unfavorable yield variance?
What could be a reason for an unfavorable yield variance?
In calculating the labor mix variance, what factors are involved?
In calculating the labor mix variance, what factors are involved?
What does the labor yield variance measure?
What does the labor yield variance measure?
If a material mix variance is favorable, what implication could it have on yield variance?
If a material mix variance is favorable, what implication could it have on yield variance?
Which of the following calculations represents the Material Yield Variance?
Which of the following calculations represents the Material Yield Variance?
Which is a consequence of using a cheaper material mix?
Which is a consequence of using a cheaper material mix?
What is the key component that the labor yield variance focuses on?
What is the key component that the labor yield variance focuses on?
Which classification of standards is considered the most effective for inducing optimal worker performance?
Which classification of standards is considered the most effective for inducing optimal worker performance?
What is the main responsibility of the purchasing manager regarding material variances?
What is the main responsibility of the purchasing manager regarding material variances?
Which of the following variances is indicative of a scenario where higher quality materials are used?
Which of the following variances is indicative of a scenario where higher quality materials are used?
In a four-variance analysis for overhead, which variance accounts for the difference between actual variable overhead and applied variable overhead?
In a four-variance analysis for overhead, which variance accounts for the difference between actual variable overhead and applied variable overhead?
Which standard type is primarily based on what is actually expected to occur considering future conditions and inefficiencies?
Which standard type is primarily based on what is actually expected to occur considering future conditions and inefficiencies?
What causes an unfavorable labor efficiency variance?
What causes an unfavorable labor efficiency variance?
During variance analysis, which factor is least likely to contribute to an unfavorable material price variance?
During variance analysis, which factor is least likely to contribute to an unfavorable material price variance?
In the context of overhead variances, what does the volume variance measure?
In the context of overhead variances, what does the volume variance measure?
Which of the following factors should be considered when establishing standards for performance evaluation?
Which of the following factors should be considered when establishing standards for performance evaluation?
What type of variance might occur if the use of lower quality materials leads to a favorable price outcome but results in excess usage?
What type of variance might occur if the use of lower quality materials leads to a favorable price outcome but results in excess usage?
What does a higher skilled staff contribute to in terms of labor variances?
What does a higher skilled staff contribute to in terms of labor variances?
Which calculation method separates overhead variances into spending, efficiency, and volume variances?
Which calculation method separates overhead variances into spending, efficiency, and volume variances?
Which variance is the responsibility of the production manager in relation to direct labor?
Which variance is the responsibility of the production manager in relation to direct labor?
Material mix and yield variances are calculated when:
Material mix and yield variances are calculated when:
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Study Notes
Standard Costing and Variance Analysis
- Standard Cost: A planned unit cost of a product or service, representing a target cost used for planning, control, and motivation.
- Standard Cost System: A product costing system using standard quantities and prices for components, enabling cost control through actual vs. standard comparisons.
- Benefits of Standard Cost Systems: Clerical efficiency, motivation through performance expectations, planning using current costs, control through variance analysis, and decision-making support.
- Components of Standard Cost Systems: Materials, labor, and overhead. Standards should be developed by a group with representatives from cost accounting, industrial engineering, personnel, data processing, purchasing, and management.
Material Variances
- Material Price Variance: Measures the difference between the actual price paid for materials and the standard price. (AQp x AP) - (AQp x SP)
- Material Quantity Variance: Measures the difference between the actual quantity of materials used and the standard quantity allowed for production. (AQU x SP) - (SQ x SP)
- Responsibility: Purchasing manager for price variance, Production manager for quantity variance.
- Causes of Material Variances: Quality changes, bulk discounts, supplier changes, price increases, budgeting errors, and production efficiency.
Labor Variances
- Labor Rate Variance: Measures the difference between the actual labor rate paid and the standard labor rate. (AH x AR) - (AH x SR)
- Labor Efficiency Variance: Measures the difference between the actual hours worked and the standard hours allowed for production. (AH x SR) - (SH x SR)
- Responsibility: Production manager for both labor rate and efficiency variances.
- Causes of Labor Variances: Skilled worker mix, overtime/bonus changes, budgeting errors, staff motivation, and unforeseen wage increases.
Overhead Variances
- Overhead Variance Analysis: Methods include four-variance, three-variance, and two-variance approaches, each focusing on different aspects of overhead analysis.
- Four-Variance Analysis: Separates variances by variable overhead (VOH) spending, VOH efficiency, fixed overhead (FOH) spending, and volume.
- Three-Variance Analysis: Combines VOH variances into a single spending variance, focusing on total overhead spending, efficiency, and volume.
- Two-Variance Analysis: Further consolidates overhead variances into a budget/controllable variance and a volume variance.
Material Mix and Yield Variances
- Material Mix Variance: Measures the difference in cost resulting from using a different combination of materials than the standard mix. (AQ x AM x SP) - (AQ x SM x SP)
- Material Yield Variance: Measures the difference in the actual output achieved compared to the standard output expected from the quantity of materials used. (AQ x SM x SP) - (SQ x SM x SP)
- Interpretation: Favorable mix variance suggests using a higher proportion of cheaper materials, while unfavorable yield variance indicates lower output from a given input.
Labor Mix and Yield Variances
- Labor Mix Variance: Measures the cost impact of using a different mix of high or low-paid workers than the standard mix. (AH x AM x SR) - (AH x SM x SR)
- Labor Yield Variance: Measures the cost impact of using more or fewer labor hours than the standard hours allowed for production. (AH x SM x SR) - (SH x SM x SR)
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