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Unformatted text preview: CHAPTER 8 QUESTIONS 1. Management determines in advance what the cost should be to manufacture a product and subsequently compares the actual cost of manufacturing the product with this stand- ard. Deviations from the standard can be im- mediately determined, inefficiencies can be readily detected, and appropriate action can be taken to correct an unfavorable situation. Under the standard cost accounting system, management has a specific goal for produc- tion costs. If this goal is not reached, man- agement also has the information to determ- ine why it was not achieved. 2. Standard cost is the predetermined calcula- tion of what the cost should be. Actual cost is the historical cost, which can be determ- ined only after a product or job has been completed. 3. A standard is a norm against which perform- ance can be measured. In a manufacturing company, it represents what it should cost to manufacture a product under certain given conditions. Depending on the approach of the company, determination of standards may or may not take into consideration rest periods, holidays, vacations, and inefficient conditions such as lost time, waste, or spoil- age. 4. Standard costs are determined for direct materials, direct labor, and factory over- head. The standard costs, the actual costs, and the variances are recorded in appropri- ate accounts. Variances are analyzed and investigated, and appropriate action is taken. 5. The setting of standards involves a pooling of knowledge and experience of all the fact- ory executives. Thus it is possible to review completely every manufacturing element that affects the cost of a completed article, and to establish a standard cost for each article. In setting standard materials cost, management must accurately determine the exact quantity of materials that should be procured and estimate the cost per unit that should be paid. In setting labor standards, management must determine, after com- plete analysis, the time required for each op- eration or for each department to finish a unit of product and must accurately estimate cost or rate per hour for this time. 6. A variance is a difference or deviation from an established goal. In standard cost ac- counting, it indicates a difference between actual costs and standard costs. It is a devi- ation from predetermined manufacturing costs. 7. Variances are usually recorded in the gener- al journal at the end of the month, except for the materials purchase price variance, which is recorded at the time of purchase. 8. Price variances in materials costs are the differences between standard and actual costs due to fluctuations in the price paid for the raw materials. Quantity variances in ma- terials costs are the differences between standard and actual costs due to fluctu- ations in the quantities of materials used....
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- Spring '11