chapter 12: standard costs and balance

Question 1

standards that are imposed by government agencies

Answer 1

regulations

Question 2

standard costs

Answer 2

predetermined unit costs that are used as measures of performance

Question 3

Advantages of standard costs

Answer 3

facilitate management planning

promote greater economy by making employees more cost-conscious

help set selling prices

contribute to management control by providing basis for evaluation and cost control

help highlight variances in management by exceptions

simplify costing of inventories and reduce clerical costs

Question 4

when are the advantages of standard costs available?

Answer 4

when standard costs are carefully established and prudently used

Question 5

consequences of using standards only as a way of placing blame¿

what is done to counteract this?

Answer 5

can have a negative effect on managers and employees

many companies offer money incentives to employees who meet their standards to minimize this effect

Question 6

the difference between standards and budgets

Answer 6

in the way the terms are expressed

A standard is a unit amount

A budget is a total amount

Question 7

true or false

A standard is concerned with each individual cost component that makes up the entire budget

Answer 7

true

Question 8

how does the managerial accountant provide important input for management in the standard-setting process?

Answer 8

by accumulating historical cost data

by knowing how costs respond to changes in activity levels

Question 9

what do we require from standard costs to be effective in controlling costs?

Answer 9

standard costs need to be up to date at all times

Question 10

ideal standards

Answer 10

the term for optimum levels of performance under perfect operating conditions

Question 11

normal standards

Answer 11

efficient levels of performance that are attainable under expected operating conditions

Question 12

are ideal standards or normal standards used more frequently?

why?

Answer 12

normal standards

most managers believe that ideal standards lower the morale of the entire workforce because they are so difficult, if not impossible, to meet

Question 13

what is necessary to establish the standard cost of producing a product?

Answer 13

we need to establish standards for each manufacturing cost element (DM, DL, MOH)

Question 14

what is the standard for each manufacturing element determined by?

Answer 14

the standard price to be paid and the standard quantity to be used

Question 15

the direct materials price standard

what is it based on?

Answer 15

the cost per unit of direct materials that should be incurred

should be based on the purchasing department’s best estimate of the cost of raw materials

includes related costs, such as receiving, storing, and handling the material

Question 16

The direct materials quantity standard

what us included

Answer 16

quantity of direct materials that should be used per unit of finished goods

expressed as a physical measure, such as kilograms, barrels, or litres

management should consider both the quality and quantity of materials that are required to manufacture the product

should include allowances (extra amounts) for unavoidable waste and normal spoilage

Question 17

The standard direct materials cost per unit

Answer 17

the standard direct materials price · the standard direct materials quantity

Question 18

The direct labour price standard

what is is based on?

what does it include?

Answer 18

also called the direct labour rate standard

the rate per hour that should be incurred for direct labour

based on current wage rates

adjusted for expected changes, such as cost of living adjustments (COLAs)

generally includes employer payroll taxes and benefits

Question 19

The direct labour quantity standard

Answer 19

also called the direct labour efficiency standard

the time that should be required to make one unit of the product

includes rest periods, cleanup, machine set-up, and machine downtime

Question 20

The standard direct labour cost per unit

Answer 20

standard direct labour rate · the standard direct labour hours

Question 21

standard predetermined overhead rate

Answer 21

determined by dividing budgeted overhead costs by an expected standard activity index

The standard manufacturing overhead rate per unit

= the predetermined overhead rate · the activity index quantity standard

Question 22

Normal capacity

Answer 22

the average activity output that a company should experience over the long run

Question 23

Total Standard Cost Per Unit

Answer 23

the sum of the standard costs of direct materials, direct labour, and manufacturing overhead

Question 24

A standard cost card

Answer 24

the basis for determining variances from standards

prepared for each product after finding the total standard cost per unit

Question 25

the differences between total actual costs and total standard costs

Answer 25

Variances variances can also indicate differences between total budgeted costs and total actual costs (not crucial for this chapter)

Question 26

unfavorable variance what does it suggest?

Answer 26

When actual costs are higher than standard costs It suggests that too much was paid for one or more of the manufacturing cost elements or that the elements were used inefficiently

Question 27

favorable variance what does it suggest?

Answer 27

when actual costs are less than standard costs It suggests there is efficient management of manufacturing costs and efficient use of direct materials, direct labour, and manufacturing overhead

Question 28

what is a hidden bad factor that could lead to a favorable variance?

Answer 28

could be obtained by using inferior materials A variance is not favourable if quality control standards have been sacrificed

Question 29

the variance is expressed in total dollars or a per-unit basis?

Answer 29

total dollars

Question 30

two ways to calculate the Total Variance

Answer 30

Actual Costs - Standard Costs Materials Variance + Labour Variance + Overhead Variance = Total Variance

Question 31

what do you need to calculate the Materials Variance and Labour Variance?

Answer 31

Price Variance for each --> we hold the quantity constant (at the actual quantity) but vary the price (actual versus standard) Quantity Variance for each --> we hold the price constant (at the standard price) but vary the quantity (actual versus standard)

Question 32

total direct materials budget variance (TDMBV)

Answer 32

the difference between the amount paid (actual quantity times actual price) and the amount that should have been paid based on standards (standard quantity times standard price of materials)

Question 33

The total materials variance could be caused by what?

Answer 33

differences in the price paid for the materials or by differences in the amount of materials used

Question 34

formula for total materials variance

Answer 34

materials price variance + materials quantity variance = total materials variance¡

Question 35

materials price variance

Answer 35

the difference between the actual price and the standard price Total Actual Quantities (TAQ) · Actual Price (AP) - Total Actual Quantities (TAQ) · Standard Price (SP) = Materials Price Variance (MPV)

Question 36

materials quantity variance

Answer 36

results from differences between the amount of material actually used and the amount that should have been used the difference between the standard cost of the actual quantity (actual quantity · standard price) and the standard cost of the amount that should have been used (standard quantity · standard price for materials) Total Actual Quantities (TAQ) · Standard Price (SP) - Total Standard Quantities (TSQA) · Standard Price (SP) = Materials Price Variance (MQV)

Question 37

what is the first step when using the matrix to find variances?

Answer 37

the formulas for each cost element are calculated

Question 38

The investigation of a materials price variance usually begins where?

Answer 38

in the purchasing department

Question 39

when is the purchasing department responsible for any materials price variances?

Answer 39

when the delivery method used, the availability of quantity and cash discounts, and the quality of the materials requested have been considered in setting the price standard and there is still variances

Question 40

when are material price variances out of the purchasing department's control?

Answer 40

when prices rise faster than expected when there are some actions by groups that the company cannot control sometimes, a production department may be responsible for the price variance

Question 41

The starting point for determining the cause(s) of an unfavorable materials quantity variance

Answer 41

the production department

Question 42

when is the production department responsible for any materials quantity variances?

Answer 42

inexperienced workers faulty machinery carelessness

Question 43

when when is the purchasing department responsible for any materials quantity variances?

Answer 43

when the the materials obtained by the purchasing department were of inferior quality

Question 44

Formula for total direct labour budget variance (TDLBV)

Answer 44

the difference between the amount actually paid for labour (actual hours · actual rate) and the amount that should have been paid (standard hours · standard rate for labour) Total Actual Hours (TAH) · Actual Rate (AR) - Total Standard hours Allowed (TSHA) · Standard Rate (SR)

Question 45

Components of total labour variance

Answer 45

Labour Price Variance + Labour Quantity Variance = Total Labour Variance

Question 46

Labour Price Variance (LPV)

Answer 46

results from the difference between the rate paid to workers and the rate that was supposed to be paid Total Actual Hours (TAH) · Actual Rate (AR) - Total Actual Hours (TAH) · Standard Rate (SR) = Labour Price Variance (LPV) or multiplying actual hours worked by the difference between the actual pay rate and the standard pay rate TAH × (AR − SR) = LPV

Question 47

The labour quantity variance

Answer 47

results from the difference between the actual number of labour hours and the number of hours that should have been worked for the quantity produced Total Actual Hours (TAH) · Standard Rate (SR) - Total Standard Hours Allowed (TSHA) · Standard Rate (SR) = Labour Quantity Variance (LQV) or multiply the standard rate by the difference between the total actual hours worked and total standard hours allowed SR · (TAH - SH) = LQV

Question 48

Labour price variances usually result from which two factors

Answer 48

(1) paying workers higher wages than expected | (2) a misallocation of workers

Question 49

when is the manager responsible for labour price variances?

Answer 49

When workers are not unionized and there are wage increases that caused the labour price variances

Question 50

when is the production department responsible for labour price variances?

Answer 50

abour price variances that result from misallocation of the workforce

Question 51

what do labour quantity variances relate to?

Answer 51

the efficiency of workers

Question 52

to whom can we usually relate the cause of a labour quantity variance?

Answer 52

the production department

Question 53

when is the production department responsible for labour quantity variances?

Answer 53

poor worker training worker fatigue faulty machinery carelessness

Question 54

why is the task more challenging for finding manufacturing overhead variances?

Answer 54

both variable and fixed overhead costs must be considered

Question 55

the difference between the actual overhead costs and overhead costs applied based on standard hours allowed for the amount of goods produced

Answer 55

the total overhead variance

Question 56

Total standard hours allowed

Answer 56

The hours that should have been worked for the units produced

Question 57

Formula for total overhead budget variance

Answer 57

Actual Overhead - Overhead Applied = Total Overhead Variance Overhead Applied: Total Standard Hours Allowed (TSHA) · Standard Rate (SR)

Question 58

total variable overhead budget variance (TVOHBV)

Answer 58

shows whether variable overhead costs were effectively controlled the actual variable overhead costs incurred are compared with budgeted costs for the total standard hours allowed

Question 59

Formula for the total variable overhead budget variance

Answer 59

Actual Variable Overhead - Variable Overhead Applied = Total Variable Overhead Budget Variance (TVOHBV) Variable Overhead Applied: Total Standard Hours Allowed (TSHA) · Standard Rate (SR)

Question 60

Formula for variable overhead spending (price) variance

Answer 60

Actual Variable Overhead - Total Actual Hours (TAH) · Standard Rate (SR) = Variable Overhead Spending (Price) Variance (VOHSPV)

Question 61

Formula for variable overhead efficiency (quantity) variance

Answer 61

Total Actual Hours (TAH) · Standard Rate (SR) - Total Standard Hours Allowed (TSHA) · Standard Rate (SR) = Variable Overhead Efficiency Variance (VOHEV)

Question 62

total fixed overhead variance

Answer 62

the difference between the actual fixed overhead and the total standard hours allowed · by the fixed overhead rate

Question 63

Formula for the total fixed overhead variance

Answer 63

Actual Fixed Overhead - Fixed Overhead Applied = Total Fixed Overhead Variance Fixed Overhead Applied: Total Standard Hours Allowed (TSHA) · Standard Rate (SR)

Question 64

fixed overhead spending (budget) variance

Answer 64

shows whether spending on fixed costs was under or over the budgeted fixed costs for the year

Question 65

Formula for fixed overhead spending (budget) variance

Answer 65

Actual Fixed Overhead Costs - Fixed Overhead master Budget (Static Budget) = Fixed Overhead Spending (Budget) Variance (FOHSV) Fixed Overhead master Budget (Static Budget): Normal Capacity Hours (NCH) · Standard Fixed Rate (SR)

Question 66

The fixed overhead volume variance

Answer 66

answers the question of whether we effectively used our fixed capacity

Question 67

If we produces less than normal capacity would allow, an unfavourable or favorable variance results?

Answer 67

unfavourable variance

Question 68

If we produces more than normal capacity would allow, an unfavourable or favorable variance results?

Answer 68

favorable variance

Question 69

Formula for fixed overhead volume variance

Answer 69

Fixed Overhead master Budget (Static Budget) - TSHA · SR = Fixed Overhead Volume Variance Fixed Overhead master Budget (Static Budget): Normal Capacity Hours (NCH) · Standard Fixed Rate (SR) or Fixed Overhead rate · (NCH - TSHA)

Question 70

what is important to remember when calculating the overhead variances?

Answer 70

1. The standard hours allowed are used in each of the variances. 2. The total budget overhead variance generally relates to total variable overhead budget variance and the fixed overhead spending (budget) variance only 3. The volume variance relates only to fixed overhead costs 4. Over-applied or under-applied overhead is the difference between the total actual overhead costs (variable + fixed) and the budget overhead at the standard base (based on direct labour hours) allowed

Question 71

how is the overhead volume variance also called?

Answer 71

the production volume variance

Question 72

causes of an unfavorable overhead spedningvariance

Answer 72

(1) a higher-than-expected use of indirect materials, indirect labour, and factory supplies (2) increases in indirect manufacturing costs

Question 73

on whom does the responsibility of overhead spending variance rest on?

Answer 73

the production department

Question 74

on whom does the responsibility of overhead volume variance rest on? when are they to blame?

Answer 74

the production department inefficient use of direct labour or machine breakdowns

Question 75

when the cause of a overhead volume variance is a lack of sales orders, on whom does the responsibility rest?

Answer 75

not the production department would be the sales department

Question 76

Variance reports make it easier or harder to use the “management by exception” approach?

Answer 76

easier

Question 77

income statements prepared for management

Answer 77

cost of goods sold is stated at standard cost and the variances are disclosed separately

Question 78

what types of variances increase or decrease COGS?

Answer 78

Unfavorable variances increase cost of goods sold favorable variances decrease cost of goods sold

Question 79

can income statements for shareholders be reported at standard costs instead of actual costs?

Answer 79

yes if the variances are not that big

Question 80

The balanced scorecard

Answer 80

uses financial and non-financial measures in an integrated system integrated system links performance measurement and a company's strategic goals

Question 81

The four most commonly used balanced scorecard perspectives

Answer 81

The financial perspective The customer perspective The internal process perspective The learning and growth perspective

Question 82

The balanced scorecard financial perspective

Answer 82

the most traditional view of the company uses the financial measures of performance that most firms use

Question 83

The balanced scorecard customer perspective

Answer 83

evaluates how well the company is performing from the viewpoint of those people who buy and use its products or services measures how well the company compares with competitors in terms of price, quality, product innovation, customer service, and other dimensions

Question 84

The balanced scorecard internal process perspective

Answer 84

evaluates the internal operating processes that are critical to success All critical aspects of the value chain are evaluated to ensure that the company is operating effectively and efficiently

Question 85

The balanced scorecard learning and growth perspective

Answer 85

evaluates how well the company develops and retains its employees includes an evaluation of such things as employee skills, employee satisfaction, training programs, and the communication of information

Question 86

In summary, the balanced scorecard does what

Answer 86

1. Employs both financial and non-financial measures 2. Creates links so that high-level corporate goals can be communicated all the way down to the shop floor 3. Provides measurable objectives for such non-financial measures as product quality, rather than vague statements such as “We would like to improve quality.” 4. Integrates all of the company's goals into a single performance measurement system, so that too much weight will not be placed on any single goal