Chapter 9

Question 1

Standard Costing

Answer 1

Standard costing is an accounting system that can be combined with job order costing. When a business uses standard costing it calculates, on a yearly basis or more often if necessary, the most efficient cost of manufacturing each of its products. These costs are known as standard costs. The standard costs are recorded in the accounting system and are later compared to the actual manufacturing costs.

Question 2

Calculating the Standard Cost of a Product

Answer 2

Standard costs are developed for all three factory cost elements, direct material, direct labour and factory overhead.

Question 3

Direct Material Standard

Answer 3

A standard is developed for the price of the direct material purchased and the quantity of the direct material used to make a product.

Question 4

Direct Labour Standard

Answer 4

A standard is developed for direct labour, the employee wage rate and the number of hours required to make a product.

Question 5

Factory Overhead Standard

Answer 5

A standard is developed for the factory overhead. Factory overhead can be divided into fixed and variable types.

Question 6

Fixed Factory Overhead Cost

Answer 6

Fixed factory overhead, within the relevant range, does not change with the number of products made.
Fixed factory overhead costs include:
- rent of factory
- depreciation of factory plant and equipment
- insurance of factory plant and equipment
- the salary of the factory supervisor

Question 7

Variable Factory Overhead Cost

Answer 7

Variable factory overhead, within the relevant range, changes with the number of products made.
Variable factory overhead costs include:
- indirect material
- the cost of electricity required to operate the plant and equipment

Question 8

Development of the Factory Overhead Application Rates

Answer 8

The factory overhead expected to be consumed in the next accounting period, known as the budgeted factory overhead, is estimated before the start of the period. This expected cost is then allocated to each of the products manufactured in the period.

Question 9

Standard Fixed Factory Overhead Application Rate

Answer 9

The standard fixed factory overhead rate to be applied to each product is:
(Budgeted Fixed Factory Overhead Cost)/(Budgeted Direct Labour Hours)
= $/Direct Labour Hour

Question 10

Standard Variable Factory Overhead Application Rate

Answer 10

The standard variable factory overhead rate to be applied to each product is:
(Budgeted Variable Factory Overhead Cost) / (Budgeted Direct Labour Hours)
= $/Direct Labour Hour