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Unformatted text preview: Chapter 11 Standard Costs and Variance Analysis QUESTIONS 1. Actual costs are compared with standard costs to evaluate performance. If investigation of differences between actual and standard costs indicates that operations are inefficient, corrective action can be taken. 2. Standard costs can be developed as follows: Material price Price lists provided by suppliers Material quantity Specified in engineering plans or recipes Direct labor rates Wage rates as specified in labor contracts and/or estimated by the management for different categories of workers Direct labor quantity Time and motion studies, and analysis of past data Overhead rate Estimated by dividing the amount of anticipated overhead by an estimate of the allocation base 3. Ideal standards are based on a perfect environment and do not include an allowance for equipment breakdown or material defects. Attainable cost standards are those that take into account a variety of circumstances (e.g., equipment breakdown) that will lead to costs greater than ideal. 4. Managers trying to achieve favorable material price variances may buy inferior material or in quantities that are too large (i.e., they overinvest in inventory) to get lower prices. 5. A favorable material price variance may occur if lower quality material is purchased. Similarly, a favorable labor rate variance may occur if workers having less than desirable level of skills are hired at lower wage rates. Both factors are likely to cause material spoilage and waste resulting in an unfavorable material quantity variance. 6. Management should investigate all significant variances because even a favorable variance may be indicative of poor management decisions (e.g., a favorable material price variance may be related to the purchase of inferior materials). 7. Yesif total output is less than the output expected at the time the overhead rate was determined, less fixed overhead will be applied to production compared to the budget (i.e., there will be an unfavorable overhead volume variance). This does not indicate that overhead costs are in or out of controlit simply indicates that production is less than planned. Jiambalvo Managerial Accounting 8. Only those variances that are deemed exceptional should be investigated. The cost and likely benefits of variance investigation should be considered in this decision. 9. Management by exception means that special attention is paid to those occurrences (such as variances) which are deemed exceptional (i.e., out of the ordinary.) 10. It implies that managers should be held accountable for only those variances that they can control. EXERCISES E1. LO 3 Unless the Cutting Department reduces production to 600 units per hour, excess work in process Inventory will build up in front of the Chemical Bath Department....
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- Spring '09