STANDARD COSTING AND VARIANCE ANALYSIS

Theories

TRUE OR FALSE

1. An advantage of standard costs is that they simplify costing of inventories and reduce clerical costs.
2. Normal standards should be rigorous but attainable.
3. Actual costs that vary from standard costs always indicate inefficiencies.
4. Ideal standards will generally result in favorable variances for the company.
5. Once set, normal standards should not be changed during the year.
6. The standard cost card tells the manager what the final manufactured cost should be for a single unit of product.
7. Standard costs are generally determined by analyzing actual costs or prior periods.
8. Practical standards are generally viewed as having better motivational characteristics than ideal standards.
9. Ideal standards allow for machine breakdown time and other normal inefficiencies.
10. In determining a material price standard, the invoice cost should be included, but any freight or handling costs
should be excluded.
11. Materials price variance are best isolated when materials are placed into production.
12. All variances between standard cost and actual cost should be given attention by the management.
13. A direct labor price standard is frequently called the direct labor efficiency standard.
14. The standard predetermined overhead rate must be based on direct labor hours as the standard activity index.
15. The overhead volume variance relates only to fixed overhead costs.
16. If production exceeds normal capacity, the overhead volume variance will be favorable.
17. There could be instances where the production department is responsible for a direct materials price variance.
18. A two-way analysis of overhead consists of controllable variance and volume variance.
19. A materials quantity variance is calculated as the difference between the standard direct materials price and the
actual direct materials price multiplied by the actual quantity of direct materials used.
20. The overhead controllable variance relates primarily to fixed overhead costs.
21. Standard costing applies to both manufacturing and non-manufacturing costs.
22. The standard cost system is compatible with job order costing, but not with process costing.
23. A variance with a debit balance indicates unfavorable performance.
24. Unfavorable variances should be reviewed, but significant favorable variances need not be reviewed.
25. Standards can pinpoint responsibility and, if properly used, can help motivate employees.

MULTIPLE CHOICE QUESTIONS

1) A standard cost is
a. A cost which is paid for a group of similar products
b. The average cost in an industry
c. A predetermined cost
d. The historical cost of producing a product last year

2) Which of the following statements is not true?

a. A standard cost is more accurate than a budgeted cost.
b. Standard is a unit amount.
c. In concept, standards and budgets are essentially the same.
d. The standard cost of a product is equivalent to the budgeted cost per unit of product.

3) If standard costs are incorporated into the accounting system,

a. It may simplify the costing of inventories and reduce clerical costs.
b. It can eliminate the need for the budgeting process.
c. The accounting system will produce information which is less relevant than the historical cost accounting
system.
d. Approval of the stockholders is required.

4) Standard costs
a. May show past cost experience
b. Help establish expected future costs
c. Are the budgeted costs per unit in the present
d. All of the above
5) Which of the following is not considered an advantage of using standard costs?
a. Standard costs can reduce clerical costs.
b. Standard costs can be useful in setting prices for finished goods.
c. Standard costs can be used as a means of finding fault with performance.
d. Standard costs can make employees cost-conscious.

6) If a company is concerned with the potential negative effects of establishing standards, they should
a. Set loose standards that are easy to fulfill
b. Offer wage incentives to those meeting standards
c. Not employ any standards
d. Set tight standards in order to motivate people

7) If inferior-grade materials are purchased, the result may be

a. An unfavorable materials price variance
b. A favorable materials price variance
c. An unfavorable labor efficiency variance
d. Responses b and c are both correct

8) What does a favorable direct labor efficiency variance indicate?

a. The average wage rate paid to direct labor employees was less than the standard rate.
b. The standard hours allowed for the units produced were greater than actual direct labor hours used.
c. Actual total direct labor costs incurred were less than standard direct labor costs allowed for the units
produced.
d. The number of units produced was less than the number of units budgeted for the period.

9) The most appropriate time to record any variation of actual material prices from standard is
a. At the end, when all variations will be known
b. At the time of purchase
c. At the time of materials usage
d. As needed to evaluate the performance of the purchasing manager

10) Under the two-way analysis of factory overhead, the controllable variance is the difference between the
a. Budget allowance based on standard hours allowed and the factory overhead applied to production
b. Budget allowance based on standard hours allowed and the budget allowance based on actual hours
worked
c. Actual factory overhead and the factory overhead applied to production
d. Actual factory overhead and the budget allowance based on standard hours allowed

11) Which department is usually held responsible for an unfavorable materials price variance?
a. Production
b. Purchasing
c. Engineering
d. Materials handling

12) In standard costing, materials efficiency variances are the responsibility of

a. Purchasing and sales
b. Sales and industrial engineering
c. Production and industrial engineering
d. Purchasing and industrial engineering

13) Which set of terms describes the same type of variance?

a. Price variance, rate variance, use variance
b. Price variance, rate variance, efficiency variance
c. Use variance, efficiency variance, quantity variance
d. Use variance, efficiency variance, spending variance

14) An adverse labor efficiency variance indicates that

a. SH > AH
b. AH > SH
c. AH > Normal hours
d. Normal hours > AH
15) Under the two-variance method for analyzing FOH, budget or controllable variance is computed by subtracting from
AFOH costs incurred the
a. BAAH
b. Budget allowance based on normal hours
c. BASH
d. Budget allowance based on budgeted hours

16) Under the three-variance method for analyzing FOH, budget or controllable variance is computed by subtracting
from AFOH costs incurred the
a. BAAH
b. Budget allowance based on normal hours
c. BASH
d. Budget allowance based on budgeted hours

17) How do you call the sum of materials variance, labor variance, and overhead variance?
a. Mix variance
b. Yield variance
c. Volume variance
d. Production cost variance

18) Which one of the following is true concerning standard costs?

a. Standard costs are estimates of costs attainable only under the most ideal conditions, but rarely
impracticable.
b. Standard costs are difficult to use with a process costing system.
c. If properly used, standards can help motivate employees.
d. Unfavorable variance material in amount should be investigated, but large favorable variance need not be
investigated.

19) Which of the following is a purpose of standard costing?

a. Determine breakeven production level
b. Control costs
c. Eliminate the need for subjective decisions by management
d. Allocate cost with more accuracy

20) The absolute minimum cost that would be possible under the best operating conditions is a description of which
type of standard?
a. Currently attainable
b. Theoretical
c. Normal
d. Practical

21) Management scrutinizes variances because

a. Management desires to detect such variances to be able to plan for promotions.
b. Management needs to determine the benefits foregone by such variances.
c. It is desirable under conventional knowledge on good management.
d. Management recognizes the need to know why variances happen to be able to make corrective actions
and fairly reward good performers.

22) A difference between standard costs used for cost control and the budgeted costs of the same manufacturing effort
a. Can exist because standard costs represent what costs should be, whereas budgeted costs are expected
actual costs.
b. Can exist because budgeted costs are historical costs, whereas standard costs are based on engineering
studies.
c. Can exist because budgeted costs include some slack, whereas standard costs do not.
d. Cannot exist because the amounts should be the same.

23) An unfavorable price variance occurs because of

a. Price increases for raw materials
b. Price decreases for raw materials
c. Less-than-anticipated levels of waste in the manufacturing process
d. More-than-anticipated levels of waste in the manufacturing process
24) Price variances and efficiency variances can be key to the performance measurement within a company. In
evaluating the performance within a company, material efficiency variance can be caused by all of the following, except
a. Performance of the workers using the material
b. Actions of the purchasing department
c. Design of the product
d. Sales volume of the product

25) Which of the following is the most probable reason a company would experience an unfavorable rate variance and
a favorable labor efficiency variance?
a. The mix of workers assigned to the particular job was heavily weighted towards the use of higher paid
experienced individuals.
b. The mix of workers assigned to the particular job was heavily weighted towards the use of new relatively
low paid unskilled workers.
c. Because of the production schedule workers from other production areas were assigned to assist this
particular process.
d. Defective materials caused more labor to be used in order to produce a standard unit.