13.2 Budgeting and Standard Costs

Question 1

Predetermined expectations about how much a unit of input, a unit of output, or a given activity should cost

Answer 1

standard costs

Question 2

Standard costs that are set for production under optimal conditions. They are based on the work of the most skilled workers, with no allowance for waste, spoilage, machine breakdowns, or other downtime.

Answer 2

Ideal (theoretical) standards

Question 3

Performance that is expected to be achieved by reasonably well-trained workers with an allowance for normal spoilage, waste, and downtime.

Answer 3

Practical (currently attainable) standards

Question 4

A company is reviewing its standard machine hours per unit to use in its budget for the upcoming year. The machine manufacturer’s specifications indicated a unit could be made in 0.75 hours, and a benchmarking study showed a competitor produced at a speed of 0.78 machine hours per unit. The company’s actual results from last year averaged 0.83 machine hours per unit even though a standard of 0.80 machine hours per unit had been established using engineering studies. The standard the company should use in its upcoming budget is

A. 0.80 machine hours per unit
B. 0.78 machine hours per unit
C. 0.75 machine hours per unit
D. 0.83 machine hours per unit

Answer 4

A. 0.80 machine hours per unit

Standard costs are predetermined expectations about how much a given activity should cost. Standards should be based on accounting, engineering, or statistical control studies.

A standard cost is not just an average of pasts costs but an objectively determined estimate of what a cost should be. Historical data may be used to set standards by firms that lack the resources to engage in the complex task of activity analysis. However, it is not the best option in this case.

Question 5

A standard cost system uses

A. Actual prime costs with overhead applied based upon the actual cost driver units incurred.
B. Standard prime costs with overhead applied based upon the actual cost driver units incurred.
C. Standard prime costs with overhead applied based upon the standard cost driver units allowed.
D. Actual prime costs with overhead applied based upon the standard cost driver units allowed.

Answer 5

C. Standard prime costs with overhead applied based upon the standard cost driver units allowed.

Standard costs are predetermined expectations about how much a unit of input, a unit of output, or a given activity should cost. This system uses standard prime costs with overhead applied based on the standard cost driver units allowed.