Costing and Variance Analysis » Standard Costing System Discussion
Questions and Answers
Standard Costing System Discussion Questions and Answers:
- (a) Define standard costs.
(b) Name some advantages of standard cost system.
- 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.
- 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?
- Is a standard cost system equally
applicable to job order costing and process costing system?
- 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.
- 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
- Explain how materials, labor and factory
overhead standards are set, including the types of people involved and the
- What type of variances are computed for
materials, labor, and factory overhead?
- 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?
- How does the calculation of a mix variance
differ from that of a quantity variance?
- 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
- Select the answer which best completes the
(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
(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
(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
- (a) Standard costs
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
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.
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.
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.
- 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.
- (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
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
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
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
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.
- 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.
- 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
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.
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.
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.
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.
- The yield
variance is the difference between actual and standard (or expected)
yield multiplied by the standard value of product (or production). the
Yield variance = (Actual yield – standard yield) ×
weighted average of standard materials cost
- (a) 2; (b)
2; (c) 4; (d) 2; (e) 3; (f) 2; (g) 2
(h) 1; (i) 2; (j) 1
New Page 3
You may also be interested in other articles from "standard costing and
variance analysis" chapter
- Standard Costs
and Management By Exception
Setting Standard Costs - Ideal Versus Practical Standards
Direct Materials Price and Quantity Standards
Direct Materials Price Variance
Direct Materials Quantity Variance
Direct Labor Rate and Efficiency Standards
- Direct Labor Rate/Price Variance
Direct Labor Efficiency | Usage | Quantity Variance
Manufacturing Overhead Standards
Overall or net factory overhead variance.
- Controllable variance
- Volume variance
- Spending variance
- Idle capacity variance
- Efficiency variance
- Spending variance
Variable efficiency variance
Fixed efficiency variance
- Idle capacity variance
Mix and Yield Variance - Definition and Explanation
- Materials Mix and Yield Variance
- Factory Overhead Yield variance
Variance Analysis and Management By Exception
- Managerial importance and usefulness of variance analysis
Advantages and Disadvantages of Standard Costing System
Standard Costing Discussion Questions and Answers
Costing and Variance Analysis Formulas
Standard Costing and Variance Analysis Problems and Solution
Standard Costing and Variance Analysis Case Study
Home Page |
Back to Standard Costing and Variance Analysis Page
About us !
Also see formula of gross margin ratio method with financial analysis, balance sheet and income statement analysis tutorials for free download on Accounting4Management.com.Accounting students can take help from Video lectures, handouts, helping materials, assignments solution, Online Quizzes, GDB, Past Papers, books and Solved problems. Also learn latest Accounting & management software technology with tips and tricks.