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Chapter 10

acc 406 chapter 10

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Ryerson University
ACC 406
Anthony Chan

CHAPTER 10 – STANDARD COSTING: A MANAGERIAL CONTROL TOOL 1. Explain how unit standards are set and why standard cost systems are adopted  A standard cost system budgets quantities and costs on a unit basis. These unit budgets are four labour, materials, and overhead. Standard costs, therefore, are the amount that should be explained to produce a product or service  Standards are set by using historical experience, engineering studies, and input from operating personnel, marketing and accounting  Currently attainable standards are those that can be achieved under efficient operating conditions  Ideal standards are those achievable under maximum efficiency, or ideal operating conditions  Standard cost systems are adopted to improve planning and control and to facilitate product costing. By comparing actual outcomes with standards and breaking the variance into price and quantity components, detailed feedback is provided to managers. This information allows managers to exercise a greater degree of cost control than that found in a normal or actual cost system 2. Explain the purpose of a standard cost sheet  The standard cost sheet provides the details for computing the standard cost per unit. It shows the standard costs for materials, labour, and variable and fixed overhead  The standard cost sheet reveals the quantity of each input that should be used to produce one unit pf output. But using these unit quantity standards, the standard quantity of materials allowed and the standard hours allowed can be computed for the actual output 3. Describe the basic concepts underlying variance analysis, and explain when variance should be investigated  The total variance is the difference between actual costs and planned costs  In a standard costing system, the total variance is broken down into price and usage variances. By breaking the total variances into price and usage variance, managers are better able to analyze and control the total variance  Variances should be investigated if they are material and if the benefits of corrective action are greater than the costs of investigation. Because of the difficulty of assessing cost and benefits on a case by case basis, many firms set up formal control limits. 4. Compute the materials variances, and explain how they are used for control  The materials price and usage are computed by using either a three-pronged approach or formulas  The materials price variance is the difference between the actual amount of materials used and the amount of materials that should have been used.  When a significant variance is signalled, and investigati
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