Cost Accounting // Ch. 9 Standard Costing: A Functional-Based Control Approach

The factoring formula for the Materials Usage variance is what?

(AQ-SQ) x SP

What is the formula for computing the variable overhead spending variance?

(AVOR x AH) - (SVOR x AH) , or (AVOR - SVOR) x AH

THe Standard costs are set by whom?

-Historical Experience -Engineering Studies -Input from operating personnel, marketing, and accounting

Standards are often classified as either two things?

-Ideal Standard or -Currently Attainable Standard

The four-variance method is the most detailed, and includes what four variances?

-Variable Overhead Spending Variance -Variable Overhead Efficiency Variance -Fixed Overhead Spending Variance -Fixed Overhead Volume Variance

To facilitate this process of calculating the direct materials usage variance as DM are issued, what three forms should be used?

1) A Standard Bill of Materials 2) Color-Coded Excessive Usage Forms 3) Color-Coded-returned materials forms

The direct materials price can be computed at one of two points, what are they?

1) MPV can be computed when direct materials are issued for use in production, or 2) MPV can be computed when they are PURCHASED

If the actual volume is more than budgeted volume, the volume variance signals that what has occurred?

A GAIN HAS OCCURRED. The gain is equal to the increase in contribution margin on the extra units produced and sold

What does AP stand for?

AP means the actual price per unit of the input

The actual input cost is calculated how?

AP x AQ

What does AQ stand for?

AQ is the actual quantity of input used

As a GENERAL RULE, in a standard costing system, what are all inventories carried at?

AT STANDARD Therefore, everything in our records are at STANDARD

An actual cost system uses what cost assignment approach?

Actual Cost System assigns the actual costs of all three manufacturing inputs to products

What is Flexible budget variance in formula form?

Actual Costs - Flexible Costs

***The actual variable overhead rate is simply actual variable overhead divided by what?

Actual Variable Overhead divided by ACTUAL HOURS

The volume variance shows the impact of a difference between what?

Actual units produced and the Budgeted units

Rather than selecting direct labor rate standards reflecting those different levels, what is often used?

Average wage rate is often used!!!

Wage rates for a particular direct labor activity often differ among workers because of differing what?

Because of differing levels of SENIORITY

A variable overhead spending variance can arise because of what?

Because prices for individual variable overhead items have increased or decreased

The volume variance occurs because because of what?

Because the actual output differs from the budgeted output or volume

Overhead is applied to production by debiting what?

By debiting Work in Process and crediting variable and fixed overhead control accounts

***How do standard cost systems, enhance planning and control and improve performance measurement?

By developing UNIT PRICE and QUANTITY STANDARDS an overall variance can be decomposed into a price or rate variance and a usage or efficiency variance, by performing a decomposition, a manger has more information.

Most companies dispose of variances at the end of the year by doing what?

By either closing them to COST OF GOODS SOLD or prorating them to WIP, COGS, and F.G.

Standard costing allows managers to manage costs by establishing what?

By establishing standards that reflect efficient operating conditions. Standards also help managers understand what needs to be done to improve current and future performance.

If the variances are immaterial, then the most expedient disposition is simply to assign them to what?

COST OF GOODS SOLD

Unfavorable variances will be DEBITED to what?

COST OF GOODS SOLD

In recording variances, FAVORABLE VARIANCES are recorded as what?

CREDITS

Immaterial variances are closed out to what?

Closed out to Cost of Goods Sold

Which one of these two points is preferred and why?

Computing the MPV when they are PURCHASED is PREFERRED!! It doesn't make any sense to calculate the MPV when direct materials are issued for use in production the more timely information, the more likely proper managerial action can be taken. DM may sit in inventory for weeks or months before they are needed in production

How are the control limits usually expressed as?

Control limits are usually expressed as PERCENTAGE of the standard or may be expressed as the ABSOLUTE DOLLAR AMOUNT

Favorable Variances will be CREDITED to what?

Cost of Goods sold

______________ can be achieved under efficient operating conditions. Allowance is made for normal breakdowns, interruptions, less than perfect skill, and so on. These standards are demanding but achievable

Currently Attainable Standards

_______________________ are those that can be achieved under efficient operating conditions

Currently Attainable Standards

In recording VARIANCES, unfavorable variances are always recorded as what?

DEBITS

The overhead analysis in this chapter assumes that ______________________ is the only driver used to assign overhead costs to products.

DIRECT LABOR HOURS Thus when we speak of variable and fixed overhead, we are assuming that it is fixed or variable with respect to direct labor hours, a unit-level driver

The _____________________ is the difference between the actual hours worked and the standard hours for actual production multiplied by the standard wage

Direct Labor Efficiency Variance

The __________________________ is the difference between actual wage and standard wage multiplied by the actual number of direct labor hours

Direct Labor Rate Variance

The ____________________ is the difference between the amount of materials actually used and what should have been used for the actual quantity of units produced multiplied by the standard price

Direct Materials Usage Variance (MUV)

The variable overhead efficiency variance is directly related to what?

Directly related to the DIRECT LABOR EFFICIENCY OR USAGE VARIANCE

Any difference between the actual fixed overhead and budgeted fixed overhead must be die to what?

Due to a change in the amount of fixed overhead -- some item has increased or decreased with regard to what was expected -- this is called spending variance

Using the price variance to evaluate the performance of purchasing has some limitations. Elaborate on this

Emphasis on meeting or beating the standard can can produce some undesirable outcomes.

T/F Standard costing can be used in manufacturing organizations but not service

FALSE Standard costing can be used for both manufacturing and service organizations

If LESS is spent on fixed overhead items than was budgeted, the spending variance is what?

FAVORABLE

If actual production is more than budgeted production, the volume variance will be what?

FAVORABLE

If the actual price is less than standard price, the MPV is what>

FAVORABLE (F)

Whenever standard prices or usage is greater then actual price or usage what occurs?

FAVORABLE (F) VARIANCE

A ____________ can be used to identify the direct material or direct labor inout costs that should have been incurred for the actual level of activity

FLEXIBLE BUDGET

Flexible budgets variances generate important feedback for managers but fail to reveal whether the sources of the variances are attributable to what?

Fail to reveal whether the sources of the variances are attributable to INPUT PRICES, INPUT QUANTITIES, or both

If the actual quantity is less than the standard quantity then the Materials Usage variance is what?

Favorable (F)

The formula for computing the Fixed Overhead Spending Variance is what?

Fixed Overhead Spending Variance = AFOH - BFOH) Actual Fixed Overhead minus the Budgeted Fixed Overhead

To help managers understand why fixed overhead may differ from the applied fixed over, the total variance can be broken down into two variances, what are they?

Fixed Overhead Spending Variance, and Fixed Overhead Volume Variance

The _____________________ is the difference between budgeted fixed overhead and the applied fixed overhead

Fixed Overhead Volume Variance

Flexible budgets evaluate efficiency by comparing actual costs and actual revenues with the corresponding budgeted amounts for

For the same level of activity

The price and usage variances can be computed using a couple approaches what are they?

Formula approach Factoring Approach Graphical, three-pronged Approach

If standards are too tight and never achievable, workers become frustrated and however performance declines. However, challenging but achievable standards can lead to what?

HIGHER PERFORMANCE LEVELS

Developing standards requires significant input from a variety of sources, what are the typical three?

Historial experience (should be used with caution because relying on input-output relationships from the past may perpetuate some inefficiencies. 2) Engineers and 3) Operating personnel such as: accounting, operations personnel and, purchasing.

____________________ demand maximum efficiency and can be achieved only if everything operates perfectly. No machine breakdowns, slack, or lack of sill are allowed

IDEAL STANDARD

The direct materials usage variance is recognized when direct materials are what?

ISSUED

The standard cost of the direct materials issued is assigned to what?

ISSUED TO WORK IN PROCESS

_____________________ are those that achievable under maximum efficiency or ideal operating conditions

Ideal Standards

Therefore the variable overhead efficiency variance is caused by what?

Inefficient or efficient use of DIRECT LABOR

The three-variance method does not require dividing costs into what?

Into Fixed and Variable Components and only identifies -spending variance -efficiency variance -volume variance

In the four-variance method, we first divide categories into categories of what?

Into categories of fixed and variable

Because it is difficult to assess the costs and benefits of variance analysis on a case-by-case, many firms adopt the general guideline of what?

Investigating variances only if they fall outside an acceptable range.

The USE of direct labor, however is controllable by whom?

Is controllable by the PRODUCTION MANAGER

when was the budgeted fixed overhead determined?

It was determined in advance of the year, and that the fixed overhead rate used to apply fixed overhead to product, was calculated then as well.

__________________ are continuous improvements standards. They reflect planned improvement and are a type of currently attainable standard. They have a cost reduction focus and because of their emphasis on continuous improvement, are constantly changing

KAIZEN STANDARDS

What is the factoring formula for the Labor Efficiency Variance?

LEV = (AH - SH) x SR

What is the formula for the Labor Efficiency Variance (LEV)

LEV = (AH x SR) - (SH x SR)

What is the factoring formula for Direct Labor Rate Variance

LRV = (AR - SR) x AH

What is the formula for Direct Labor Rate Variance?

LRV = (AR x AH) - (SR x AH)

Direct labor rates are largely determined by what?

Largely determined by EXTERNAL FACTORS such as labor markets and union contracts

The journal entry to record the direct labor rate and the direct labor efficiency variance are made how?

MADE SIMULTANEOUSLY

A ________________ is created whenever the actual mix of inputs differs from the standard mix

MIX VARIANCE

The formula for MPV is what?

MPV = (AP x AQ) - (SP x AQ) or (AP - SP)x AQ

The formula for the computing the materials usage variance or MUV is what?

MUV = (SP x AQ) - (SP - SQ)

Random variations around the standard are expected. Because actual performance will rarely meet the established standards, nor does management expect it to do so, what should management do?

Management should have in mind an ACCEPTABLE RANGE OF PERFORMANCE

What are some reasons for adopting a standard cost system?

Managing costs, improving planning and control, facilitate decisions making, and facilitating product costing

The total budget variance measures what?

Measures the difference between the actual cost of direct materials and direct labor and their budgeted costs for the actual level of activity

_______________ is the difference between actual and standard UNIT PRICES of an input multiplied by the actual quantity of input

PRICE (RATE) VARIANCE

_______________ specify how much should be paid for the quantity of the input to be used.

PRICE STANDARDS

The _________________ is generally responsible for direct materials usage. Minimizing scrap, waste, and rework are all ways in which they can ensure that the standard is met.

PRODUCTION MANAGER

Standard costing systems are used for what?

Planning, operating, control, and decision making ******

The difference between what should have been spent per hour and what actually was spent per hour is a type of what?

Price Variance

The total budget variance can be broken down into two categories what are they?

Price and Usage Variances

Computing the direct materials price variance (MPV) and the direct materials usage variance (MUV) tells managers whether the difference is due to what?

Price, Usage, or both. Any variance can be investigated further to see if there is a problem ***

Standard costing simplifies product costing for firms in ____________ industries?

Process costing industries. There would be no need to compute a unit cost for each equivalent unit-cost category.

In setting price standards, what must be considered?

Purchasing - must consider discounts, freight, and quality Personnel - must consider payroll taxes, fringe benefits, and qualifications. Accounting - responsible for recording price standards and for preparing reports that compare actual performance with the standard

___________________ specify how much of the input should be used for the unit of output

QUANTITY STANDARDS

What does SP stand for?

SP is the standard unit price of an input

What does SQ stand for?

SQ is the standard quantity of inputs allowed for the actual output

What are used to assign direct labor cost to WORK IN PROCESS?

STANDARD HOURS AND STANDARD RATES ARE USED to assign Direct Labor costs to work in process Actual prices and quantities are not used. This emphasizes that all inventories are CARRIED AT STANDARD

Fixed overhead is made up of a number of individual items such as what?

Salaries, depreciation, taxes, and insurance

When should the direct materials usage variance be computed?

Should be computed as direct materials are ISSUED for production

Why is the budgeted fixed overhead variance relatively small?

Since many fixed overhead costs are affected primarily by long-run decisions, not by changes in production levels, the budget variance is usually small. For example, depreciation, salaries, taxes, and insurance costs are NOT likely to be different than planned

The ______________________ identifies the quantity of direct materials that should be used to produce a predetermined quantity of output

Standard Bill of Materials it acts as a Materials requisition form. The production manager presents this form to the materials manager and receives the standard quantity allowed for the indicated output

The _________________________ shows the amount and cost of direct materials, direct labor, and overhead needed to make one unit of output

Standard Cost Sheet

The ______________ provides the detail underlying the standard unit cost. It reveals the quantity of each input that should be used to produce one unit of output

Standard Cost sheet

A _______________________ budgets quantities and costs on a unit basis for direct labor, direct materials, and overhead ***

Standard Costing System

Both products and service use inputs such as direct materials, direct labor, and overhead. Using Standard costing simply does what?

Standard costing simply establishes price and quantity standards for these inputs regardless of whether the inputs are associated with tangible or intangible products

Standard cost systems are useful for decision making and product costing. How do standard cost systems provide product costing information?

Standard costing systems provide readily available unit cost information that can be used for pricing decisions. This is particularly helpful in firms that engage in extensive bidding

Admittedly, the price of direct materials is largely beyond his or her control; however, the price variance can be influenced by such factors as quality, quantity, discounts, distance of the source from the plant, and so on. These factors are often under the control of who?

THE PURCHASING AGENT

******In a standard costing system, variable overhead is applied using what?

THE STANDARD HOURS ALLOWED FOR THE ACTUAL OUTPUT (SH)

The ________________ is the difference between the actual cost of the input and its standard cost

TOTAL BUDGET VARIANCE

The _______________________ can be due to a difference between actual and planned wage rates for direct labor, between actual hours worked versus the standard hours allowed for actual production, or a combination of both

TOTAL DIRECT LABOR VARIANCE

The ______________________ is the difference between the actual fixed overhead and the applied fixed overhead

TOTAL FIXED OVERHEAD VARIANCE

T/F Actual costs are never entered into an inventory account

TRUE

T/F All variances are closed out at the end of the year

TRUE

T/F Although flexible budget variances provide significant information for control, developing STANDARDS for input prices and input quantities allows a more detailed understanding of the sources of these variances

TRUE

T/F Because actual costs rarely exactly equal the standard, variances occur frequently. Investigating variances is costly. Therefore, it is useful for managers to have a rule that tells them when variances should be investigated, and when they are likely of little consequence

TRUE

T/F Budgets help managers in planning and also set standards that are used to control and evaluate managerial performance

TRUE

T/F Companies may carry costs at standard throughout the year, but must restate costs and inventories at the end of the year to actual cost. Therefore, variance accounts must be closed out and their balances applied to Cost of Goods Sold (if immaterial)

TRUE

T/F Due to the fixed nature of the costs involved, however, managers find it useful to spend time looking at fixed overhead on an item-by-item

TRUE

T/F Every nonzero variance must be tagged as favorable or unfavorable to let the manager know the direction of the deviation from standard

TRUE

T/F For direct materials and direct labor, total variances are broken down into price and efficiency variances. The total over head is also broken down into variances.

TRUE

T/F Managers can use the standard quantities allowed, in planning (to estimate how much will be required for planned production) and control (to compare with the actual quantities used)

TRUE

T/F Standard costs facilitate budgeting, but the input price and input quantity standards will also allow us to obtain a more detailed analysis of the Flexible Budget Variance

TRUE

T/F The MPV is calculated as the difference between actual and standard prices multiplied by actual quantity

TRUE

T/F The materials usage variance tells managers whether total materials are in accordance with standards. The mix variance gives further information about materials usage since difference materials have different standard prices

TRUE

T/F The standard variable overhead rate represents the weighted cost per direct labor hour that should be incurred for all variable overhead items

TRUE

T/F The upper control is standard plus the allowable deviation, and the lower control is standard minus the allowable deviation

TRUE

T/F The use of EFFICIENCY VARIANCES enhances operational control. Also the standard costing system can provide a great deal of improved measure of managerial efficiency

TRUE

T/F The yield variance tells managers whether total inputs resulted in the amount of output expected

TRUE

T/F This, the Fixed overhead rate is the rate that is would take to apply fixed overhead to production assuming that the actual production equals the budgeted production.

TRUE

T/F With standard costing systems, a manager can tell whether the variance is due to differences between planned prices and actual prices, to differences between planned usage and actual usage, or both

TRUE

T/F the variable overhead spending variance and the variable overhead efficiency variance give managers information they can use in controlling costs

TRUE

T/F Standard costs are the amount that should be expended to produce a product or service

TRUE

T/F The Materials Usage Variance or MUV is quickly calculated as the difference between the actual and standard amounts of direct materials multiplied by the Standard Price

TRUE

T/F Variable overhead is assumed to vary as the production volume changes

TRUE Thus variable overhead changes in proportion to changes in the direct labor hours USED.

Computing the direct labor rate variance (LRV) and the direct labor efficiency variance (LEV) tells managers whether the difference is due to what?

Tells the managers whether the difference is due to wage rates, hours worked, or a combination of both. Any variance can be investigated further to see if there is a problem

The _____________________ measures the difference between the direct labor hours that were actually used and the direct labor hours that should have been used

The Direct Labor Efficiency Variance (LEV)

The __________________ computes the difference between what was paid to direct laborers and what should have been paid

The Direct Labor Rate Variance (LRV)

The _______________________ compares the actual price of materials with the standard price. this difference is multiplied by the ACTUAL AMOUNT PURCHASED

The Direct Materials Price Variance

The _________________ is the difference between what was actually paid for the direct materials and what would have been paid for the actual quantity bought if it had been bought at the standard price

The Direct Materials Price Variance (MPV)

The ______________________ compares the actual amount of materials USED with the standard amount of materials for actual production. The difference is then multiplied by the STANDARD PRICE

The Direct Materials Usage Variance

If the production manager has to requisition more direct materials later, then what for should be used?

The Excessive usage form is USED

The ____________________________ is defined as the difference between the actual fixed overhead and the budgeted fixed overhead

The Fixed Overhead Spending Variance

Similarly the Total Fixed Overhead variance is divided into two components, what are they?

The Fixed Overhead Spending Variance, and The Fixed Overhead Volume Variance

Out of these three methods, which one is preferred?

The Four-Variance Method

Responsibility of the direct labor rate variance is generally assigned to whom?

The Individuals who decide how direct labor will be used. or the production manager

The ____________________ shows the impact of different input proportions on the cost of the output

The MIX VARIANCE

If the actual price is greater than standard, the MPV is what?

The MPV is Unfavorable (U)

The responsibility for controlling the direct materials price variance us usually who's?

The PURCHASING AGENTS

If fewer direct materials are used then the standard requires, the production manager can return the leftover direct materials with what form?

The Returned-Materials Form - it provides feedback to the managers

Standard costs are developed for direct materials, direct labor, and overhead used in producing a product or service. The total of these standard costs yields the ________________________.

The STANDARD COST PER UNIT

The __________________ can be due to a difference between actual and and planned prices for the materials, between actual quantity used versus the standard quantity, or a combination of both

The Total Direct Materials Variance

The _________________________ is the difference between applied and actual overhead -- and is also broken down into component variances

The Total Overhead Variance

The _________________ can be used to compute the total amount of inputs allowed for the actual product.

The Unit Quantity Standards This is essential component in computing efficiency variances.

The ________________________ measures the aggregate effect of difference between actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR).

The Variable Overhead Spending Variance

Then the Total Variable Overhead Variance is divided into two components, what are they?

The Variable overhead spending variance and the Variable overhead efficiency variance

The acceptable range is what?

The acceptable range is the standard, plus or minus an ALLOWABLE DEVIATION

If the direct materials price variance is computed at the point of purchase, then AQ needs to be defined as what?

The actual quantity of direct materials purchased rather than actual direct materials used

The total variable overhead variance shows the difference between actual overhead and what?

The amount expected given the actual level of production

The spending variance shows the difference between what?

The difference between the actual fixed overhead and the budgeted fixed overhead

What is one drawback of using the four-variance method?

The drawback is that it requires a company to identify the actual variable and fixed costs as well as budgeted rates and costs.

The rate (price) or efficiency (usage) variances for direct labor can be calculated using two approaches what are they?

The formula approach or the three-pronged Graphical Approach

The planned or budgeted STANDARD INPUT COST is computed how?

The planned or budgeted STANDARD input cost is SP x SQ

The spending variance shows the difference between what?

The spending variance shows the difference between the actual variable overhead rate and the standard variable overhead rate.

Using these unit quantity standards for the standard cost sheet what can be computed?

The standard quantity of direct materials allowed and the standard hours allowed can be computed for the actual output

For companies that wish to avoid the need to track actual variable and fixed costs, companies should use what method?

The two- and the three- variance analyses -- these methods do not require knowledge of actual variable and actual fixed overhead. These methods provide less detail and thus, less information.

The variable overhead efficiency variance shows the impact of the difference of what?

The variable overhead efficiency variance shows the difference between actual hours worked and THE STANDARD HOURS THAT SHOULD HAVE BEEN WORKED ON THE VARIABLE OVERHEAD

How are standard product costs determined?

They are determined using QUANTITY and PRICE standards for direct materials, direct labor, and overhead

Why do direct labor rate variances occur?

They often occur because an average wage rate is used for the rate standard or because more skilled and more highly paid laborers are used for less skilled tasks.

If variable overhead costs really change in proportion to changes in direct labor hours, then the responsibility of the efficiency variance should be assigned to whom?

To the individual who has responsibility for the use of direct labor: THE PRODUCTION MANAGER

Assuming that volume variance measures capacity utilization implies that the general responsibility for this variance should be assigned to who?

To the production department

What is the formula for Total Budget Variance?

Total Budget variance = (AP x AQ) - (SP x SQ)

The ________________________ is broken down into the variable overhead spending and the efficiency variances.

Total Variable Overhead Variance

The ________________________ is broken down into the fixed overhead spending and volume variances

Total fixed overhead variance

If actual production is less than budgeted production, then the volume variance will be what?

UNFAVORABLE

An ____________________ occurs whenever actual prices or usage of inputs are greater than standard prices or usage

UNFAVORABLE (U) VARIANCE

_________________ is the difference between the actual and standard quantity of input multiplied by the standard unit price of the input

USAGE (EFFICIENCY) VARIANCE

If the actual quantity is greater than the standard quantity, the Materials Usage variance is what?

Unfavorable (U)

The ___________________ is defined as the product of these two standards: Standard price x Standard Quantity or (SP x SQ)

Unit Standard Cost

Unit standards must be converted to what in order to determine how much of each resource is expected to be used.

Unit standards must be converted to STANDARD QUANTITIES of INPUTS ALLOWED FOR ACTUAL PRODUCTION in order to determine how much of each resource is expected to be used.

The ________________________ measures the change in variable overhead consumption that occurs because of efficient (or inefficient) USE OF DIRECT LABOR

Variable Overhead Efficiency Variance

The efficiency variance is computed using what formula?

Variable Overhead Efficiency Variance = (AH - SH) SVOR

The detail of the standard cost card allows managers to determine what>

What aspects of total costs were different than planned

The __________________ shows the difference between the amount of output that was produced versus the expected output for a given amount of input

YIELD VARIANCE

A __________________ occurs whenever the actual yield (outputs) differs from the standard yield.

Yield Variance

Variable overhead is not a homogenous input -- and it is made up of what?

it is made up of a large number of individual items such as indirect materials, indirect labor, electricity, maintenance, and so on

The top and bottom measures of the allowable range are called what?

the CONTROL LIMITS

In contrast to a standard costing system, a normal costing system does what for product costing

they use a predetermined overhead rate to apply overhead., and use actual DM and actual DL to assign costs to products