ch7 - Chapter 7 1 CHAPTER 7 STANDARD COSTING AND VARIANCE...

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Chapter 7 CHAPTER 7 STANDARD COSTING AND VARIANCE ANALYSIS QUESTIONS 1. A standard cost card summarizes the direct material, direct labor and overhead standard quantities and prices needed to complete one unit of output. The bill of materials specifies the quality and quantity of each raw material needed to complete one unit of output. The standard cost card shows the assignment of standard costs to each raw material in the bill of materials to determine the total standard material cost of one unit of output. The operations flow document details all necessary operations to make a unit of output or summarizes the time to make one unit of output. These time details are used to develop standard labor cost and time and overhead rates for production of one unit of output. 2. For materials, the quantity standard is based on physical quantities used in the past, engineering studies, improvements expected in handling or usage, and normal waste and spoilage allowances. The quality standard is based on a consideration of tradeoffs between higher quality and higher cost of inputs. The analysis should consider the effects of input quality on material yields, final product quality, labor standards, etc. The quantities shown on a bill of materials are not always the same as those shown on a standard cost card because of allowances made for normal waste and/or spoilage. The bill of materials presents the minimum quantities needed for production; the standard cost card presents the more realistic quantities allowed for production. 3. Each total variance can be broken down into a price component and a usage component. All price variances measure the difference between what was actually spent and what should have been spent for the physical measure of what was actually used. All usage variances measure the difference between the physical measure of what was actually used and what should have been used, denominated in dollars. For materials, the two variances are the price and quantity variances. For direct labor, the two variances are the rate and efficiency variances. 4. Standard hours is the normal amount of input time it should take to produce the actual quantity of output generated during the period. 1
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2 Chapter 7 5. Management is expected to control input costs and input quantities in the short run and, therefore, the reference is made to "controllable." Overhead spending and efficiency variances are considered controllable variances because, to some extent, measures can be taken during (and after) production to correct problems that arise related to such overhead costs. One part of the overhead spending variance is the fixed overhead spending variance; cost items causing this variance must be controlled at the point of incurrence rather than during production. The volume variance is related to the fixed overhead budget which tends not
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This note was uploaded on 12/12/2008 for the course ACCT 310 taught by Professor Nacemagner during the Fall '08 term at Western Kentucky University.

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ch7 - Chapter 7 1 CHAPTER 7 STANDARD COSTING AND VARIANCE...

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