ch26 - CHAPTER 26 Performance Evaluation Through Standard...

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CHAPTER 26 Performance Evaluation Through Standard Costs ANSWERS TO QUESTIONS 0 1. (a) This is incorrect. Standard costs are predetermined unit costs. (b) Agree. Examples of governmental regulations that establish standards for a business are the Fair Labor Standards Act, the Equal Employment Opportunity Act, and a multitude of environmental laws. 0 2. (a) Standards and budgets are similar in that both are predetermined costs and both contribute significantly to management planning and control. The two terms differ in that a standard is a unit amount and a budget is a total amount. (b) There are important accounting differences between budgets and standards. Except in the application of manufacturing overhead to jobs and processes, budget data are not journalized in cost accounting systems. In contrast, standard costs may be incorporated into cost accounting systems. It is possible for a company to report inventories at standard costs in its financial statements, but it is not possible to report inventories at budgeted costs. 0 3. In addition to facilitating planning, standard costs offer the following advantages to an organization: (1) They promote greater economy by making employees more "cost-conscious." (2) They may be useful in setting selling prices. (3) They contribute to management control by providing a basis for evaluating the performance of managers in controlling costs. (4) Performance may be evaluated through "management by exception." (5) They simplify the costing of inventories and reduce clerical costs. 0 4. The management accountant provides input to the setting of standards through the accumulation of historical cost data and knowledge of the behavior of costs in response to changes in activity levels. Management has the responsibility for setting the standards. 0 5. Ideal standards represent the optimum level of performance under perfect operating conditions. Normal standards represent an efficient level of performance that is attainable under expected operating conditions. 0 6. (a) The materials price standard should be based on the purchasing department’s best estimate of the cost of raw materials and an amount for related costs such as receiving, storing, and handling. (b) The materials quantity standard should be based on both quality and quantity requirements plus allowances for unavoidable waste and normal spoilage. 0 7. Agree. The direct labor quantity standard should include allowances for rest periods, cleanup, machine setup, and machine downtime.
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0 8. With standard costs, the predetermined overhead rate is determined by dividing budgeted over-head costs by an expected standard activity index. 0 9. A favorable cost variance has a positive inference. It suggests efficiencies in incurring manufacturing costs and in using direct materials, direct labor, and manufacturing overhead.
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This note was uploaded on 03/13/2012 for the course ACCOUNTING 100 taught by Professor Boyle during the Fall '11 term at Seton Hill.

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ch26 - CHAPTER 26 Performance Evaluation Through Standard...

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