Standard Costing System Discussion Questions and Answers:

Questions:

1. (a) Define standard costs.
   (b) Name some advantages of standard cost system.
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2. A team of management consultants and company executives concluded that a standard cost installation was desirable vehicle for accomplishing the objectives of a progressive management. State some uses of standard costs that can be associated with the above decision.
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3. Does a standard cost system increases or decreases the amount of accounting and clerical effort and expense required to prepare cost reports and financial statements?
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4. Is a standard cost system equally applicable to job order costing and process costing system?
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5. A conference speaker discussing budgets and standard costs made the following statement: “Budgets and standards are not the same thing. They have different purposes and are set up and used in different ways ; yet a specific relationship exists between them.”
   (a) Identify distinctions or differences between budgets and standards.
   (b) Identify similarities between budgets and standards.
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6. The use of standard costs in pricing and budgeting is quite valuable since decisions in the fields of pricing and budgetary planning are made before the costs under consideration are incurred. Discuss.
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7. Explain how materials, labor and factory overhead standards are set, including the types of people involved and the method used.
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8. What type of variances are computed for materials, labor, and factory overhead?
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9. In a paper mill, materials specification standards are set up for various grades of pulp and secondary furnish (waste paper) for each grade and kind of paper produced. Yet at regular intervals the cost accountant is able to determine a materials mix variance. Why does a mix variance occurs?
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10. How does the calculation of a mix variance differ from that of a quantity variance?
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11. A cost standard in a process industry is often based on an assumed yield rate. Any difference in actual yield from standard yield will produce a yield variance. Express this variance in formula form.
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12. Select the answer which best completes the statement:
    (a) A purpose of standard costing is to: (1) determine the break even production level; (2) control  costs; (3) eliminate the need for subjective decisions by management ; (4) allocate cost more accurately.

    (b) A company employing very tight (theoretical) standards in a standard costing system should expect that : (1) a large incentive bonus will be paid; (2) most variances will be unfavorable; (3) employees will be strongly motivated to attain the standards; (4) costs will be controlled better than if lower standards were used.

    (c) Of the different types of standards listed below, the one which best describes labor costs that should be incurred under forthcoming efficient operating conditions is : (1) ideal; (2) basic; (3) maximum efficiency; (4) normal.

    (d) In standard costing, standard hours allowed is a means of measuring: (1) standard output at standard hours; (2) actual output at standard hours; (3) standard output at actual hours; (4) actual output at actual hours.

    (e) In preparing cost report at standard for process costing: (1) equivalent units are not used; (2) equivalent units are computed using an approach that ignores inventories; (3) the actual equivalent units are multiplied by the standard cost per unit; (4) the standard equivalent units are multiplied by the actual cost per unit.

    (f) In a standard cost system, the materials purchase price variance is obtained by multiplying the: (1) actual price by the difference between actual quantity purchased and standard quantity allowed; (2) actual quantity purchased by the difference between actual price and standard price; (3) standard price by the difference between standard quantity purchased and standard quantity allowed; (4) standard quantity purchased by the difference between actual price and standard price.

    (g) A favorable labor efficiency variance indicates: (1) the average wage rate paid was less than the standard rate; (2) the standard labor hours allowed were greater than the actual labor hours used; (3) the actual total labor cost incurred was less than the standard labor cost allowed  for the units produced; (4) the number of units produced was less than the number of units budgeted for the period.

    (h) Given below are notations and their respective meanings:
    AH = Actual hours
    SHA = Standard hours allowed for actual production
    AR = Actual rate
    SR = Standard rate
    The formula that represents the labor efficiency variance is: (1) SR × (AH – SHA); (2) AR × (AH – SHA); (3) AH × (AR – SR); (4) SHA × (AR – SR).

    (i) The standard cost variance representing the difference between actual factory overhead incurred and budgeted factory overhead based on actual hours worked is the (1) volume variance; (2) spending variance; (3) efficiency variance; (4) quantity variance.

    (j) The fixed portion of the standard factory overhead application rate is a function of a predetermined “normal” activity level. If standard hours allowed for good output equal this normal activity level for a given period, the volume variance will be: (1) zero; (2) favorable; (3) unfavorable; (4) either favorable or unfavorable, depending on the budgeted overhead.
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Answers:

1.  (a) Standard costs are the predetermined costs of manufacturing products during a specific period under current or anticipated operating conditions. Standards aid in planning and controlling operations.
   (b) The advantages of a standard cost system include the following:
   1. The process in itself often discloses inefficiencies, because the setting of standards requires a thorough analysis of all cost functions.
   2. The process of setting standards forces management to plan efficient and economical operations.
   3. Standard costs establish clearly defined lines of cost responsibility and authority.
   4. Standard costs are likely to be an important aid to management in obtaining acceptable job performance by providing a clear idea as to what constitutes acceptable performance.
   5. Variances between actual performance and standard costs facilitate control through the application of the principle of exception.
   6. Faster reporting of operating data is possible; the shortened time between action and the availability  of control information helps management to prevent the development of unfavorable cost trends.
2. A few uses of standard costs are:
   (a) Establishing budgets.
   (b) Controlling costs and motivating and measuring efficiencies.
   (c) Promoting cost reduction.
   (d) Simplifying cost procedures and expediting cost reports.
   (e) Assigning costs to inventories.
   (f) Setting sales prices.
3. In some way a standard cost system reduces clerical work. Variance reports add new tasks, which may make expenses about equal. The fact that more information is available about the operations of the business should be of greater value than the expenses of operating the accounting system.
4. Yes, standard costs can be used either in job order costing where the cost of specific jobs put through a factory is ascertained, or process costing where the cost of production in one or more manufacturing departments for a given period of time is determined. a standard cost system applied to either job order or process costing will bring the added advantage of cost analysis hitherto unavailable.
5. (a) Budgets and standards are not the same thing; yet a specific relationship exists between them. The first difference between budgets and standards is one of purpose. Budgets are statements of expected cost. At the beginning of a given period, they are used to forecast requirements of finance, work force, and other variables related to production and sales. Later in a given period, they are used as comparison to be sure that actual costs are not exceeding expectations. Standard costs, on the other hand, do not necessarily show what costs may be expected to be, but rather, what they might be if certain highly desirable performance are attained. For this reason they cannot be used alone for forecasting.
   The second difference between budgets and standards is one of emphasis. A budget emphasizes cost levels that should not be exceeded. If they are exceeded, then the whole foundation upon which profits are predicted is jeopardized. But a standard emphasizes the levels to which costs should be reduced. I these levels are reached, profits are increased. Costs are not to exceed budget; they are to approach standards.
   A third difference is on of completeness. Budgets are customarily set for all departments in the company, from sales to manufacturing. Standards, however, are often set only for the manufacturing divisions. Budgets customarily include both income and expense, whereas standards are more frequently set for expenses or costs only.
   A fourth difference is one of analysis and breakdown. When cost differs from budget, a lower cost indicates good performance; a higher cost tells of a perilous situation. But when actual cost differs in any marked degree from standards, the nature and cause of the variance should be investigated so that needed corrective steps may be taken in time.
   These difference may be summarized by saying that a budget is a marker for keeping out of trouble, whereas a standard is a compass that points the way to improvements.
   (b) Although standards and budgets have certain differences, they possess similarities which are of such a nature that the existence of standard costs greatly facilitates budget preparation. The first similarity is that both budgets and standards attempt to predetermine expenses. The budget and the standards have been set by records of current operational methods or procedures and have not just been set by hopes for so-called “good production.”
   Second, both consider departmental expenses according to accounts. generally speaking, all departments have their sub-accounts. They have been budgeted for a certain amount to be spent for specific uses. If there are cost differences, they should be investigated at the time they are happening.
   Third similarity is that both assume costs are controllable along direct lines of supervision and responsibility. Supervisors are responsible to manage not only for production but also for cost of production. Supervisors should be aware of the budget as well as the standards for their departments.
   Finally, both require the issuance of periodic comparative cost reports. When the costs are much higher or lower than the budgeted amount and are controlled by standards, these differences should be broken down to show management specific reasons for these differences at each interim reporting period.
   Budgets are similar to standard costs in their methods of approach and measurement. If standard costs are known, budgeted costs can be derived from them by the application of ratios.
6. To set sales prices, executives need cost information furnished by the accounting department. Since standard costs represent the cost that should be attained in a well managed plant operated at normal capacity, they are ideally suited for furnishing information which will enable the sales departments to price products.
   Budgets are used for planning and coordinating future activities and for controlling current activities. When budget figures are based on standard costs, the accuracy of the resulting budget is strongly influenced by the reliability of the standard costs. With standards available, production figures can be translated into the manufacturing costs.
7. Materials – Materials price standards in most cases should be set by the purchasing officer. Because prices are determined by the external influences, setting price standards is mainly a task of accurate prediction.
   Materials quantity standards should be set by engineers responsible for product design. In setting these standards, companies may use engineering studies, sample runs, historical studies, or a combination thereof depending on specific materials and plant conditions.
   Labor – Labor rates are often a result of union negotiations and should be obtained from the personnel department. Labor time standards are set by properly trained and experienced methods engineers using time and motion studies.
   Factory Overhead – Variable factory overhead standards are based on the company’s flexible budget.
   The fixed overhead standard is based on the company’s budget for fixed factory overhead, divided by an appropriate measure of activity.
8. Materials: Price and quantity variance
   Labor: Rate and efficiency variance
   Factory overhead: (1) Controllable and volume variance (2) Spending variance, idle capacity variance, efficiency variance (3) Spending variance, variable overhead efficiency variance, Fixed overhead efficiency variance, Idle capacity variance.
   Mix and yield variances also can be calculated for the cost elements.
9. Although specifications are established primarily by the laboratory, mix changes are made when production people feel the less costly grades of furnish or even pulp can be used satisfactorily. Production people hope, of course, that the final result will still be the same high quality product. The difference between the engineered laboratory standard and the actual usage at different standard costs results in a mix variance.
10. The quantity variance is the result of comparing actual quantity at standard cost with standard quantity at standard cost. The mix variance results when actual input is used in ratios or quantities different from standard specifications at standard cost.
11. The yield variance is the difference between actual and standard (or expected) yield multiplied by the standard value of product (or production). the formula is:
    Yield variance = (Actual yield – standard yield) × weighted average of standard materials cost
12. (a) 2; (b) 2; (c) 4; (d) 2; (e) 3; (f) 2; (g) 2 (h) 1; (i) 2; (j) 1

You may also be interested in other articles from “standard costing and variance analysis” chapter

1. Standard Costs and Management By Exception
2. Setting Standard Costs – Ideal Versus Practical Standards
3. Direct Materials Price and Quantity Standards
4. Direct Materials Price Variance
5. Direct Materials Quantity Variance
6. Direct Labor Rate and Efficiency Standards
7. Direct Labor Rate/Price Variance
8. Direct Labor Efficiency | Usage | Quantity Variance
9. Manufacturing Overhead Standards
10. Overall or net factory overhead variance.
11. Controllable variance
12. Volume variance
13. Spending variance
14. Idle capacity variance
15. Efficiency variance
16. Spending variance
17. Variable efficiency variance
18. Fixed efficiency variance
19. Idle capacity variance
20. Mix and Yield Variance – Definition and Explanation
21. Materials Mix and Yield Variance
22. Labor Yield Variance
23. Factory Overhead Yield variance
24. Variance Analysis and Management By Exception
25. Managerial importance and usefulness of variance analysis
26. Advantages and Disadvantages of Standard Costing System
27. Standard Costing Discussion Questions and Answers
28. Standard Costing and Variance Analysis Formulas
29. Standard Costing and Variance Analysis Problems and Solution
30. Standard Costing and Variance Analysis Case Study

Other Related Accounting Articles:

• Overall or Net Factory Overhead Variance
• Factory Overhead Idle Capacity Variance
• Factory Overhead Spending Variance
• Standard Costing and Variance Analysis Problems & Solution
• Direct Labor Rate | Price Variance rate
• Direct Labor Standards
• Direct Labor Efficiency Variance
• Direct Materials Quantity Variance
• Standard Costing and Variance Analysis Case Study
• Setting Standard Costs – Ideal and Practical Standards