L7 - Accounting for Control

Question 1

What are Standard costs?

Answer 1

• Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost.
• This means that a manufacturer’s inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs.
• As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variances.
  
  • Based on carefully predetermined amounts
  • Used for planning labour, material and overhead requirements
  • The expected level of performance
  • Benchmarks for measuring performance

Question 2

Who sets standard costs?

Answer 2

Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations –> best to set standards with a multi-disciplinary team

They can decide between practical standards or ideal standards:

• Practical standards should be set at levels that are currently attainable with reasonable and efficient effort –> still challenging so are motivating
• Ideal standards - that are based on perfection in perfect conditions ( no waste, no employees off etc.) - are unattainable and discourage most employees

there is a third which is the basic standard, a standard is present one year and is not changed –> not good if you want an organisation to improve

Question 3

What are the two standard costs for direct materials?

Answer 3

• Price standard –> Final, delivered, cost of materials, net of discounts
• Quantity standard - Use product design specifications

Question 4

What are the two standard costs for direct labour?

Answer 4

• Rate Standards - Use wage surveys and labour contracts
• Time standards - use time and motion studies for each labour operation

Question 5

What are the two standard costs for variable overhead standards?

Answer 5

• Rate standards –> The rate is the variable portion of the predetermined overhead rate
• Activity standards –> The activity is the base used to calculate the predetermined overhead

Question 6

What does a standard cost card look like?

Answer 6

Question 7

Are standards the same as budget?

Answer 7

• A standard is the expected cost for one unit
• A budget is the expected cost for all units

Question 8

What is Standard cost variance?

Answer 8

• A standard cost variance is the amount by which an actual cost differs from the standard cost
• When actual cost > standard costs it is said to have a unfavourable or adverse variance (put a letter v or a)
• When actual costs < standards costs it is said to be favourable variance (put a letter f)

Question 9

What is the variance analysis cycle?

Answer 9

Question 10

What is price and quantity variance?

Answer 10

• the difference between actual price/quantity and standard price/quantity

Question 11

How do you calculate the standard cost variance?

Answer 11

• standard quantity!! is the quantity allowed for the actual good output
  
  • use actual output x the standard quantity
    
    • e.g. standard of 2 labour x 100 units of a good

Question 12

What can affect the labour rate variance?

Answer 12

• Using highly paid skilled workers to perform unskilled tasks results in an unfavourable rate variance.
• Poorly trained workers
• Poor quality materials
• Poor supervision of workers
• Poorly maintained equipment
• insufficient demand for the output of the factory
  
  • Accept an unfavourable labour efficiency variance
  • Build up stock

Question 13

How is variable overhead linked with direct labour hours?

Answer 13

If variable overhead is applied on the basis of direct labour hours, the labour efficiency and variable overhead efficiency variances will move in tandem