MGMT ACCT - CHAPTER 10

Describe the elements of a cost control system

Managers and managerial accountants set standard costs for direct material, direct labor, and production overhead through either historical cost analysis or task analysis. They use the standard cost as a benchmark against which to compare actual costs incurred. Managers and management by exception to determine the causes of significant cost variances.

Explain several methods for determining the significance of cost variance

Managers determine the significance of cost variance through judgment and rules of thumb. The absolute and relative sizes of variances, recurrence of variances warrant investigation. In some cases a statistical control chart can help determine the significance of cost variances.

Describe two ways to set cost standards and distinguish between perfection and practical standards

One way to set standards is to analyze historical data, which will show how much it has cost in the past to produce a product or service. Another way to set standards is to perform task analysis, in which the production is analyzed to determine what is should cost to produce. A perfection (or ideal) standard is one that can be attained only under nearly perfect operating conditions. A practical or attainable) standard can be achieved with a production process that is as efficient as practical under normal operating conditions.

Summarize some advantages of standard costing

Standard costing systems offer an organization many advantages. Among these are: sensible cost comparisons; management by exception; performance evaluation; employee motivation; and more stable product costs.

Compute and interpret the direct-material price and quantity variance and the direct-labor rate and efficiency variances

The direct-material price variance calculates the effect on production cost of deviations between actual and standard direct-material prices. The direct-material quantity variance calculates the effect on production cost of deviations between actual and standard direct-material quantities allowed, given actual production output. The direct-labor rate variance calculates the effect on production costs of deviations between actual and standard direct-labor rates. The direct-labor efficiency variance calculates the effect on production cost of deviations between actual and standard direct-labor hours allowed, given actual production output. In addition, the direct-material purchase price variance calculates the effect on spending for material purchases that is caused by deviations between actual and standard direct-material prices.

direct-material quantity variance

The direct-material quantity variance calculates the effect on production cost of deviations between actual and standard direct-material quantities allowed, given actual production output.

Prepare journal entries to record and close out cost variances (appendix)

The managerial accountant prepares journal entries; to enter the standard cost of production into Work-In Process Inventory as a product cost; to transfer the standard production cost of Finished-Goods Inventory; and to close standard production.

direct-labor efficiency variance

calculates the effect on production cost of deviations between actual and standard direct-labor hours allowed, given actual production output.

The direct-material price variance

calculates the effect on production cost of deviations between actual and standard direct-material prices.

direct-labor rate variance

calculates the effect on production costs of deviations between actual and standard direct-labor rates.

direct-material purchase price variance

calculates the effect on spending for material purchases that is caused by deviations between actual and standard direct-material prices.

Explain several common criticisms of standard costing

some common criticism of standard costing include: too high a level of aggregation exhibited by variance; untimely reporting of variances; excessive focus on direct labor; inconsistency with flexible manufacturing systems; quick outdating of standards; narrow focus of standard costs, such as ignoring the total cost of ownership; and excessive focus of cost minimization.

Explain how standard costs are used in product costing

standard-costing system achieves its product-costing purpose by recording the standard cost of production into Work-in Process Inventory as a product cost. This standard cost then flows through the Finished Goods Inventory account and into the Cost of Goods Sold account.

Describe some behavioral effects of standard costing

when variances can affect employees' reward structures, such as pay increases or promotions, they can significantly affect employee behavior. For example, an unfavorable direct-material price variance may cause a purchasing manger to purchase a lower quality of material than what is specified or needed.