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Week 4

DQ #1
What are some advantages and disadvantages of standard costs? How do managers determine what the
standard cost should be? Describe the effect of inaccurate standard costs on financial reporting.

Advantages of Standard Costs(Weygandt, Kimmel, & Kieso, 2010, pp 495).

Facilitate management planning
Promote greater economy by making employees more :cost-conscious"
Useful in setting selling process
Contribute to management control by providing basis for evaluation of cost control
Useful in highlighting variances in management by exception
Simplify costing of inventories and reduce clerical costs
Disadvantages that result from a business using standard costs are:

Controversial materiality limits for variances.

Non-reporting of certain variances.

Low morale for some workers.

"The setting of standard costs to produce a unit of product is a difficult task. It requires input
from all persons who have responsibility for costs and quantities" (Weygandt, et al, 2010, pp
495). To establish the standard cost of producing a product, it is necessary to establish standards
for each manufacturing cost element Direct materials,
Direct labor , and
Manufacturing overhead
The standard for each element is derived from the standard price to be paid and the standard
quantity to be used.
Variances occur when standard and actual costs do not match. Left unchecked, standard costing
can distort the income statement and balance sheet. Failing to adjust the standard cost for
production variances affects the income statement's cost of goods sold account. Companies can
either overstate or understate cost of goods sold. Ending inventory directly relates to errors in the
standard costing process. Similar to cost of goods sold, ending inventory reported on the balance
sheet can have overstatements or understatements.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Managerial Accounting Tools for
Business Decision Making (5th ed.). Hoboken, NJ: John Wiley & Sons, Inc..

DQ #2
When should variances be investigated? Who should be responsible for correcting a negative variance?
Why? What are some factors that can lead to variances? How can variances be corrected?

All variances should be reported to appropriate levels of management as soon as possible

The form, content, and frequency of variance reports vary considerably among
Facilitate the principle of "management by exception"
Top management normally looks for significant variances.
When a variance occurs, top management should examine the circumstances to determine the
factors that created it. A variance report is created to give an explanation.
Causes of Material Variances
Material Price Variance - factors that affect the price paid for raw materials include:
the availability of qty and cash discounts
the qty of materials requested
the delivery method used
To the extent that these factors are considered in setting the price standard, the Purchasing
Department is responsible.
Material Qty Variance - if the variance is due to inexperienced workers, faulty machinery, or
carelessness, the production department is responsible.
Causes of Labor Variances
Labor price variance - Usually results from two factors
Paying workers different wages than expected
Misallocation of workers.
The manager who authorized the wage increase is responsible for the higher wages. The
production department generally is responsible for labor price variances resulting from
misallocation of the workforce.
Labor Qty variances - relates to the efficiency of workers. The cause of a Qty variance generally
can be traced to the production department.
Depending on the findings of the variance report, and the if it falls within a variance % set by the
company, and is agreed upon by management, a journal entry to adjust the standards will be done
by the accountant.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Managerial Accounting Tools for
Business Decision Making (5th ed.). Hoboken, NJ: John Wiley & Sons, Inc..

(Weygandt, Kimmel, & Kieso, 2010, pp 212).

(Weygandt, et al, 2010, pp 215).