ACTG 2020 Chapter Notes - Chapter 10: Cost Driver, Fixed Cost, Deutsche Luft Hansa

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Chapter 10 standard costs and overhead analysis. Standard a benchmark or a norm for measuring performance. Standards are widely use in managerial accounting where they relate to quantity and cost of inputs used in manufacturing goods or producing services. Quantity and cost standards are set for major input (raw materials, labour time) Quantity standards specify how much of an input should be used to make unit of a product or provide a unit of service. Cost (price) standards specify how much should be paid for each unit of the input. Variances occur when there are discrepancies things don"t meet standards. Standards should be designed to encourage efficient future operations, not a repetition of past operations that may or may not have been efficient. Practical standards standards that allow for normal machine downtime and other work interruptions and can be attained through reasonable, although highly efficient, efforts by the average employee; tight but attainable standards our focus for the chapter.

Related Questions

1. What is standard cost?
A. The total number of units times the budgeted amount expected
B. Any amount that appears on a budget
C. The total amount that appears on the budget for product costs
D. The amount management thinks should be incurred to produce a good or service

2. A standard cost is
A. the average cost in an industry.
B. a predetermined cost.
C. the historical cost of producing a product last year
D. a cost which is paid for a group of similar products.

3. The difference between a budget and a standard is that
A. a budget expresses what costs were, while a standard expresses what costs should be.
B. a budget expresses a total amount, while a standard expresses a unit amount.
C. a budget expresses management's plans, while a standard reflects what actually happened.
D. standards are excluded from the cost accounting system, whereas budgets are generally incorporated into the cost accounting system.

4. Standard costs may be used by
A. universities.
B. governmental agencies.
C. charitable organizations.
D. all of these answers are correct

5. The final decision as to what standard costs should be is the responsibility of
A. management.
B. the quality control engineer.
C. the purchasing agent.
D. the managerial accountants.

6. The most rigorous of all standards is the
A. normal standard.
B. realistic standard.
C. conceivable standard.
D. ideal standard.

7. An unfavorable materials quantity variance would occur if
A. more materials were purchased than were used.
B. actual pounds of materials used were greater than the standard pounds allowed
C. actual pounds of materials used were less than the standard pounds allowed
D. actual labor hours used were greater than the standard labor hours allowed

8. Which of the following statements is true?
A. Variances are the differences between total actual costs and total standard costs.
B. When actual costs exceed standard costs, the variance is favorable.
C. An unfavorable variance results when actual costs are decreasing but standards are not changed.
D. all of the above are true

10. Labor efficiency is measured by the
A. materials quantity variance.
B. labor quantity variance.
C. labor rate variance.
D. total labor variance.

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Merit Inc. has used a standard cost system for evaluating theperformance of its responsibility center managers for 3 years. Topmanagement believes that standard costing has not produced the costsavings or increases in productivity and profits promised by theaccounting department. Large unfavorable variances are consistentlyreported for most cost categories, and employee morale has fallensince the system was installed. To help pinpoint the problem withthe system, top management asked for separate evaluations of thesystem by the plant manager, that controller, and the humanresources director. Their responses are summarized here. Plantmanager - The standards are unrealistic. They assume an ideal workenvironment that does not allow materials defects or errors by theworkers or machines. Consequently, morale has gone down andproductivity has declined. Standards should be based on expectedannual prices and recent past averages for efficiency. Thus, if weimprove over the past, we receive a favourable variance. Controller- The goal of accounting reports is to measure performance againstan absolute standard and the best approximation of that standard isideal conditions. Cost standards should be comparable to "par" on agolf course. Just as the game of golf uses a handicap system toallow for differences in individual players' skills and scores, itcould be necessary for management to interpret variances based onthe circumstances that produced the variances. Accordingly, in onecase, a given unfavorable variance could represent poorperformance; in another case, it could represent good performance.The managers are just going to have to recognize these subtletiesin standard cost systems and depend on upper management to be fair.Human resources director - The key to employee productivity isemployee satisfaction and a sense of accomplishment. A set ofstandards that can never be met denies managers of this vitalmotivator. The current standards would be appropriate in alaboratory with a controlled environment but not in the factorywith its many variables. If we are to recapture our old "teamspirit," we must give the managers a goal that they can achievethrough hard work.

Required: Discuess the behavioral issues involved in MeritInc.'s standard cost dilemma. Evaluate eavh of the three responses(pros and cons) and recommend a course of action.

Topaz Company makes one product andhas set the following standards for materials and labor:

	DirectMaterials	Direct Labor
Standard quantity or hours per unit	?pounds		2.50	hours
Standard price or rate	? perpound	$	8.50	per hour
Standard cost per unit	?	$	21.25

During the past month, the companypurchased 6,700 pounds of direct materials at a cost of $17,085.All of this material was used in the production of 1,300 units ofproduct. Direct labor cost totaled $24,750 for the month. Thefollowing variances have been computed:


Materials quantity variance	$	1,120	U
Total materials spending variance	$	555	F
Labor efficiency variance	$	4,250	F

Required:

1.	Fordirect materials:

a.	Compute the standard price per poundfor materials. (Donot round intermediate calculations. Round your answer to 2 decimalplaces.)

Standard price

b.	Compute the standard quantityallowed for materials for the month%u2019s production. (Round your intermediatecalculation to 2 decimal places.)

Standard quantity

pounds

c.	Compute the standard quantity ofmaterials allowed per unit of product. (Round your answer to 2 decimalplaces.)

Standard quantity

pounds per unit

2.	Fordirect labor:

a.	Compute the actual direct labor cost per hour for the month.(Round your answerto 2 decimal places.)

Actual direct labor cost per hour

Compute the labor rate variance.(Do not roundintermediate calculations. Round your answer to the nearest dollar.Indicate the effect of variance by selecting "F" for favorable, "U"for unfavorable, and "None" for no effect (i.e., zero variance).Input all amounts as positive values. Leave no cells blank - becertain to enter "0" wherever required.)

Labor rate variance

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ACTG 2020 Chapter Notes - Chapter 10: Cost Driver, Fixed Cost, Deutsche Luft Hansa

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