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Distinguish between a standard and a budget.
Both standards and budgets are predetermined costs. The primary difference is that a standard is a unit amount, whereas a budget is a total amount. A standard may be regarded as the budgeted cost per unit of product.
Identify the advantages of standard costs.
Standard costs offer a number of advantages. They (a) facilitate management planning, (b) promote greater economy, (c) are useful in setting selling prices, (d) contribute to management control, (e) permit “management by exception,” and (f) simplify the costing of inventories and reduce clerical costs.
Describe how standards are set.
- The direct materials price standard should be based on the delivered cost of raw materials plus an allowance for receiving anc handling.
- The direct materials quantity standard should establish the required quantity plus an allowance for waste and spoilage.
- The direct labor price standard should be based on current wage rates and anticipaatc adjustments such as COLAs. It also generally includes payroll taxes and fringe benefits.
- Direct labor quantity standards should be based on required production time plus an allowance for rest periods, cleanup, machine setup, and machine downtime.
- For manufacturing overhead, a standard predetermined overhead rate is used. It is based on an expected standard activity index such as standard direct labor hours or standard machine hours.
State the formulas for determining direct materials and direct labor variances.
The formulas for the direct materials variances are:
The formulas for the direct labor variances are:
- AQ*AP-SQ*SP= TOTAL MATERIAL VARIANCE
- AQ*AP-AQ*SP= MATERIAL PRICE VARIANCE
- AQ*SP-SQ*SP= MATERIAL QUANTITY VARIANCE
- AH*AR-SH*SR= TOTAL LABOR VARIANCE
- AH*AR-AH*SR= LABOR PRICE VARIANCE
- AH*SR-SH*SR= LABOR QUANTITY VARIANCE
State the formulas for determining manufacturing overhead variances.
The formulas for the manufacturing overhead variances are:
- ACTUAL OVERHEAD-OVERHEAD APPLIED = TOTAL OVERHEAD VARIANCE
- ACTUAL OVERHEAD-OVERHEAD BUDGETED = OVERHEAD CONTROLLABLE VARIANCE (VERIABLE COSTS)
- FIXED OVERHEAD*(NORMAL CAPACITY HOURS-STANDARD CAPACITY ALLOWED) = OVERHEAD VOLUME VARIANCE (FIXED COSTS)
Discuss the reporting of variances.
Variances are reported to management in variance reports. The reports facilitate management by exception by highlighting significant differences.
Prepare an income statement for management under a standard costing system.
Under a standard costing system, an income statement prepared for management will report cost of goods sold at standard cost and then disclose each variance separately.
Describe the balanced scorecard approach to performance evaluation.
The balanced scorecard incorporates financial and nonfinancial measures in an integraatc system that links performance measurement and a company's straatgic goals. It employs four perspectives: financial; customer; internal processes; and learning anc growth. Objectives are set within each of these perspectives that link to objectives within the other perspectives.
Identify the features of a standard cost accounting system.
- In a standard cost accounting system, standard costs are journalized and posted, and separate variance accounts are maintained in the ledger.
- Debit to variance account = unfavorable.
- Credit to variance account = favorable.