Understanding Standard Costing and Variance Analysis

Chapter 9:Standard Costing and Variance Analysis 1.Describe the difference between budgetary planning and control. 2.What are standard costs? a.Standard costs are set at the beginning of the period to reflect what management believes costs should be, should be set up so that they are difficult but not impossible to achieve. 3.What is the difference between ideal and attainable standards? a.Ideal Standard: standard that can be achieved only under perfect or ideal conditions. b.Easily Attainable Standards: standard that can be met with relative ease. c.Tight but Attainable Standards: a standard that is difficult, but not impossible to achieve. 4.What type of standard is best for motivating individuals to work hard? a.The best standard for motivating individuals to work hard are tight but attainable standards and standards that increase in difficulty. 5.What are the two types of standards used in a standard cost system? a.Price Standard: the price that should be paid for a specific quantity of input. b.Quantity Standard: the amount of input that should be used in each unit of product or service. 6.How do standards and budgets relate to one another? a.Budgeted costs are based on the standard costs for inputs multiplied by a specific level of output. 7.Explain the terms favorable and unfavorable. a.Favorable: Actual Costs < Standard Costs b.Unfavorable: Actual Costs > Standard Costs 8.What are the differences and similarities between a static and a flexible budget? a.Static Budget: budget based on a single estimate of sales volume, like the master budget. b.Flexible Budget: budget showing how budgeted costs and revenues will change for different levels of production or sales volumes. Shows how total costs are expected to change if actual production or sales are more or less than expected. Used to evaluate managerial performance after the fact by separating the effect of spending from the effect of volume. 9.What type of budget is a Master Budget? a.A master budget is a static budget based on estimated or budgeted sales volume. 10.What are the two DM Variances? a.DM Price Variance: AQ(SP-AP) b.DM Quantity Variance: SP(SQ-AQ) 11.What are the two DL Variances? a.DL Rate Variance: AH(SR-AR) b.DL Efficiency Variance: SR(SH-AH) 12.Be able to Calculate DM and DL Variances. a.As written above