Chapter 10 Class Solutions

Chapter 10 Class Solutions - CHAPTER 10 Standard Costing...

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CHAPTER 10 Standard Costing and Flexible Budgeting ANSWERS to Review Questions 10-1 Any control system has three basic parts: a predetermined or standard performance level, a measure of actual performance, and a comparison between standard and actual performance. The system works by making the comparison between actual and standard performance and then taking action to bring about a desired consequence. 10-2 Management by exception is a managerial technique in which only significant deviations from expected performance are investigated. 10-3 One method of setting standards is the analysis of historical data. Historical cost data provide an indicator of future costs. The methods for analyzing cost behaviour described in Chapter 7 are used to predict future costs on the basis of historical costs. These predictions then form the basis for setting standards. Another method for setting standards is task analysis, which is the analysis of a production process to determine what it should cost to produce a product or service. The emphasis shifts from what the product did cost in the past to what it should cost in the future. An example of task analysis is a time-and- motion study conducted to determine how long each step performed by direct labourers should require. 10-4 A perfection (or ideal) standard is the cost expected under perfect or ideal operating conditions. A practical (or attainable) standard is the cost expected under normal operating conditions. Many behavioural scientists question the effectiveness of perfection standards. They feel that employees are more likely to perform well when they strive to achieve an attainable standard than when they strive, often unsuccessfully, to achieve a perfection standard. 10-5 Standard material prices include the purchase price of the material and any transportation costs incurred to obtain the material. The standard quantity of material is the amount required to be included in the finished product plus
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an allowance for normal waste expected in the production process. 10-6 Direct material price variance is the difference between the actual price and the budgeted price for the actual quantity of material purchased. An unfavourable direct- material price variance means that a higher price was paid for the material than was expected when the standard was set. A favourable variance has the opposite interpretation. The manager in the best position to influence the direct- material price variance is the purchasing manager. 10-7 Direct material quantity variance is the difference between the actual quantity and the budgeted quantity at the standard price. An unfavourable direct-material quantity variance means that a larger amount of material was used in the production process than should have been used in accordance with the standard. A favourable variance has the opposite interpretation. The manager in the best position to influence the direct-material quantity variance usually is the production manager. 10-8 The direct-material price variance is based on the quantity
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This note was uploaded on 03/27/2011 for the course ECON 1106 taught by Professor Abc during the Spring '11 term at Algoma University.

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Chapter 10 Class Solutions - CHAPTER 10 Standard Costing...

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