Chapter 9 Profit Planning

Chapter 10 - Standard Costing: A Managerial Tool 1. Managers develop quantity standards when they decide what amount of input should be used per unit of output. a. True b. False ANSWER: True

2. Managers develop price standards s tandards when they determine what amount should be paid for the quantity of input to be used. a. True b. False ANSWER: True

3. The standard cost per unit of output for a particular input is calculated by multiplying the standard input price by the standard input allowed per unit of output produced. a. True b. False ANSWER: True

4. In setting standards, historical experience should be used with caution because it can perpetuate operating inefficiencies. a. True b. False ANSWER: True

5. Engineering studies are often too rigorous and may not be achievable by operating personnel. a. True b. False ANSWER: True

6. Ideal standards can be achieved under efficient operating conditions. a. True b. False ANSWER:

False

RATIONALE: No. Currently attainable standards can be achieved under efficient operating conditions. Ideal standards demand maximum efficiency and can be achieved only if everything operates perfectly.

7. Ideal standards can be achieved only if everything operates perfectly, meaning that they do not allow for any machine breakdowns, slack, etc. a. True b. False ANSWER: True

C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 10 - Standard Costing: A Managerial Tool 8. Currently attainable standards offer the most behavioral benefits because higher performance levels are attained through challenging, yet achievable, standards. a. True b. False ANSWER: True

9. Currently attainable standards can be achieved under efficient operating conditions. a. True b. False ANSWER: True

10. One reason for adopting a standard cost system is to make product costing easier. a. True b. False ANSWER: False

11. The benefits of operational control under a standard cost system can extend to all manufacturing environments. a. True b. False ANSWER:

False

RATIONALE: No. Manufacturing environments that focus on continuous improvement and JIT purchasing and manufacturing do not realize the benefits of operational control in a standard cost system.

12. Standard costs are developed for direct materials, direct labor, and variable overhead only. a. True b. False ANSWER:

False

RATIONALE: No. Standard costs are assigned for direct materials, direct labor, and variable and fixed overhead.

13. The standard quantity of materials allowed can be calculated by multiplying the unit labor standard by the actual output. a. True b. False ANSWER:

False

RATIONALE: The standard quantity of materials allowed can be calculated by multiplying the unit quantity standard by the actual output.

14. To compute the standard direct labor hours allowed, multiply the unit labor standard by the actual output. a. True b. False ANSWER: True


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Chapter 10 - Standard Costing: A Managerial Tool 15. The quantity of each input that should be used to produce one unit of output is documented on the standard cost sheet. a. True b. False ANSWER: True

16. The standard cost sheet provides the input standards needed to compute the total amount of inputs allowed for the actual output, an essential component in computing efficiency variances. a. True b. False ANSWER: True

17. The standard unit cost is developed before the standard costs for direct materials, direct labor, and overhead can be set. a. True b. False ANSWER: False

18. The unit standard quantity of inputs is vital to the computation of total amount of inputs allowed for the actual output and efficiency variances. a. True b. False ANSWER: True

19. The total budget variance is the difference between the actual cost of the input and its planned cost. a. True b. False ANSWER: True

20. The actual quantity of input at the standard price less than the standard quantity of input at the standard price equals the usage variance. a. True b. False ANSWER: True

21. The actual quantity of input at the actual price less the actual quantity of input at the standard price is the price variance. a. True b. False ANSWER: True


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Chapter 10 - Standard Costing: A Managerial Tool 22. An unfavorable usage variance would occur when the actual usage of inputs is greater than the standard usage. a. True b. False ANSWER: True

23. An unfavorable price variance occurs whenever the actual prices are greater than the standard prices. a. True b. False ANSWER: True

24. An acceptable range is established in order to determine if whether variances are significant. The acceptable range is the standard, plus or minus an allowable deviation. a. True b. False ANSWER: True

25. The sum of the price and usage variances will add up to the total materials variance only if the materials purchased is equal to the materials used. a. True b. False ANSWER: True

26. The materials price variance is computed using the actual quantity of materials used, and the materials usage variance is computed using the actual quantity of materials purchased. a. True b. False ANSWER:

False

RATIONALE: No. The materials price variance is computed using the actual quantity of materials purc hased , and the materials usage variance is computed using the actual quantity of materials used .

27. For better control, the materials price variance is computed using actual quantity of materials purchased. a. True b. False ANSWER:

True

RATIONALE: Since it is better to have information on variances earlier rather than later, the materials price variance uses the actual quantity of materials purchased rather than the actual quantity of materials used.

28. The sum of the labor rate and labor efficiency variances will always add up to the total labor variance. a. True b. False ANSWER: True


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Chapter 10 - Standard Costing: A Managerial Tool 29. Kaizen costing provides fixed standards which reflect continuous improveme improvement nt efforts. a. True b. False ANSWER:

False

RATIONALE: Kaizen costing differs from traditional standard costing in that the standard changes frequently, reflecting continuous improvement efforts.

30. A kaizen standard reflects the realized improvements for the past periods and a search for more improvements for the future. a. True b. False ANSWER:

True

RATIONALE: Setting this new level as a minimum standard for future performance locks in the realized improvements and initiates simultaneously the maintenance cycle and a search for additional improvement opportunities

31. Favorable variances are credits and unfavorable variances are debits. a. True b. False ANSWER: True

32. _______________ _______________ often means the difference between success and failure or between above-average profits and lesser profits. ANSWER: Cost control

33. The amount of input that should per unit of output is known as the _______________. sho uld be used per ANSWER: quantity decision standard quantity

34. The amount that should for the quantity of the input to be used is known as the ______________. ______________. shou ld be paid p aid for ANSWER: pricin pricing g decisi decision on standard price

35. ___________________ can provide an initial guideline for setting standards, but should be used with caution because they can can perpetuat perpetuatee existing existing inefficie inefficiencies. ncies. ANSWER: Historical experiences

36. Standards are set by using historical experiences, ___________________, and input from operating personnel, marketing, and accounting. ANSWER: engineering studies

37. ________________ demands maximum efficiency and can be achieved only if everything operates perfectly. ANSWER: Ideal standards


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Chapter 10 - Standard Costing: A Managerial Tool 38. In a ____________________, ____________________, costs are assigned to products using quantity and price standards for all three manufacturing costs: direct materials, direct labor, and overhead. ANSWER: standard costing system

39. The ____________ __________________ ______ provides the products data needed to calculate the standard unit cost. ANSWER: standard cost sheet

40. The __________________ ______________________ ____ can be used to compute the total amount of inputs allowed for the actual output. ANSWER: unit quantity standards

41. ___________________ is calculated by multiplying the unit labor standard by the actual output. ANSWER: Standard hours allowed

42. The ____________________ ____________________ is the difference between the actual cost of the input and its planned cost. ANSWER: total budget variance

43. ____________________ is the difference between the actual and standard unit price of an input multiplied by the number of inputs used. ANSWER: Price variance rate variance

44. _________________ _________________ occur whenever actual prices or actual usage of inputs are greater than standard prices or standard usage. ANSWER: Unfavorable variances

45. The ____________________ measures the difference between the actual costs of materials and their budgeted costs for actual level of activity. ANSWER: total variance for materials

46. The ____________________ measures the difference between what should have been paid for raw materials and what was actually paid. ANSWER: materials price variance

47. The _____________________ _____________________ measures the difference between the direct materials actually used and the t he direct materials that should have been used for the actual output. ANSWER: materials usage variance

48. The _______________ _______________ computes the difference between the rate paid to direct laborers and the rate that should have been paid. ANSWER: labor rate variance

49. The ___________________ measures the difference between the labor hours that were actually used and the labor hours that should have been used. ANSWER: labor efficiency variance C e n g a g e L e a r n i n g T e s t in g , P o w e r e d b y C o g n e r o

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Chapter 10 - Standard Costing: A Managerial Tool 50. ______________ focuses on the continuous reduction of the manufacturing costs of existing products and processes. ANSWER: Kaizen costing

51. A ______________ is the difference between the sales price needed to capture a predetermined market share and the desired per-unit profit. ANSWER: target cost

52. Standards based on the amount of input that should be used per unit of output are called a. quantity standards. b. price standards. standards. c. ideal standards. d. currently attainable standards. e. kaizen standards. ANSWER: a

53. Price standards are based on a. the amount of input that should be used per unit of output. b. the amount amount that that should should be paid paid for for the total quantity quantity of input input to be used. c. the amount that should be paid per unit of output. output. d. the amount that should be paid per unit of input purchased. e. None of these. ANSWER:

b

RATIONALE: Price standards are based on the pricing decision, which is the amount that should be paid for the quantity of input to be used.

54. The sources of quantitative standards include a. historical experience. b. engine engineerin ering g studie studies. s. c. input from operating personnel. d. historical experience, engineering studies, and input from operating personnel. e. None of these. ANSWER: d


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Chapter 10 - Standard Costing: A Managerial Tool 55. Which of the following is true regarding historical experience in standard setting? a. It provides very rigorous guidelines. b. Operating Operating person personnel nel may may not not be able able to achieve achieve operating operating standards standards based based on on historical historical experience. experience. c. It should be used with caution because it can perpetuate inefficiencies. d. Standards based on historical experience are better than standards based on engineering studies. e. None of these. ANSWER:

c

RATIONALE: Historical experience should be used with caution because processes are often operating inefficiently. Using standards based on past experience can perpetuate the inefficiencies.

56. Which of the following is not true true regarding engineering studies? a. They can determine the most efficient way to operate. b. They are often often achiev achievable able by by operating operating personnel. personnel. c. They provide very rigorous guidelines. d. All of these statements are true. e. More than two of these statements are true. ANSWER:

b

RATIONALE: Engineering studies are typically so rigorous they are often not achievable by operating personnel.

57. In setting price standards for materials and labor, a. the purchasing department must consider discounts, freight, and quality. b. personn personnel el must must consi consider der payroll payroll taxes taxes,, fringe fringe benefits, benefits, and qualifica qualification tions. s. c. it is the joint responsibility of operations, purchasing, personnel, and accounting. d. All of these. e. None of these. ANSWER: d

58. Ideal standards a. do not allow for machine breakdowns, slack, slack, or lack of skill (even momentarily). momentarily). b. demand demand maximum maximum efficie efficiency. ncy. c. can be achieved only if everything operates perfectly. d. All of these. e. None of these. ANSWER: d


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Chapter 10 - Standard Costing: A Managerial Tool 59. Which of the following is true regarding currently attainable standards? standards? a. They can be achieved under efficient operating conditions. b. Allowance Allowance is made made for for norma normall breakdo breakdowns, wns, interrupti interruptions, ons, etc. c. They are challenging but achievable. achievable. d. They tend to achieve higher performance levels from personnel. e. All of these. these. ANSWER: e

60. Standard cost systems are adopted a. to improve planning and control. b. to facili facilitate tate product product costin costing. g. c. to improve planning and control, and to facilitate product costing. d. to enhance the operational control of firms that emphasize continuous improvement. e. for all of these reasons. reasons. ANSWER:

c

RATIONALE: The benefits of operational control in a standard cost system may not extend to the manufacturing environments that emphasize continuous improvement and just-in-time purchasing and manufacturing.

61. Standard cost systems can enhance operational control through the use of a. efficiency variances which indicate the need for corrective action. b. price variances variances which which indicate indicate the need for better better spending spending control. control. c. standard costs which indicate the desired cost of a unit of input. d. actual costs which indicate the price received for units sold. e. All of these. these. ANSWER: a

62. Which of the following is true regarding standard cost systems in manufacturing environments environments that emphasize continuous improvement and just-in-time manufacturing and purchasing? a. The standard cost system enhances the operational control. b. The materials materials price price varianc variancee may encourage encourage the purchasi purchasing ng departm department ent to buy in in smaller smaller quanti quantities ties to reduce reduce inventories. c. Variances can be computed and presented in reports to higher-level managers. d. The operational level will benefit from the detailed computation of variances. e. None of these. ANSWER:

c

RATIONALE: Although the ben efits of operational control may not extend to these manufacturing environments, varian ces can still be computed and presented in reports to higher-level managers so they can monitor the financial dimension.


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Chapter 10 - Standard Costing: A Managerial Tool 63. In a standard cost system, costs are assigned to all of the following, except for a. direct materials. b. direct direct labor. labor. c. variable overhead. d. fixed overhead. e. none of these. ANSWER: e

64. The standard cost system differs from the actual cost system in the assignment of a. direct materials. b. direct direct labor. labor. c. overhead. overhead. d. all of the manufacturing inputs. e. none of the manufactur manufacturing ing inputs. ANSWER: d

65. Which of the following is not true true regarding normal costing systems? a. A normal costing system predetermines overhead costs. b. A normal normal costing costing system assigns assigns direct direct materials materials and direct direct labor to produc products ts using using a predet predetermin ermined ed rate. rate. c. In a normal costing system overhead is assigned using a budgeted rate and actual activity. d. A normal costing system has less capacity for control than a standard costing system. e. All of these statements are true. ANSWER:

b

RATIONALE: A normal costing sys tem assign s direct materia ls and d irect la bor to p roducts using ac tual costs .

66. Which of the following is not an an advantage of standard costing over normal costing and actual costing? a. A greater capacity for control. b. Ability Ability to easil easily y distin distinguis guish h the the FIFO FIFO and and weigh weighted ted average average methods methods of accounti accounting ng for beginni beginning ng inventor inventory y costs. c. Computing a unit cost for each equivalent unit cost category is not necessary. d. Providing for readily available unit cost information. e. All of these are advantages of standard costing. ANSWER:

b

RATIONALE: There is no need to distinguish between the FIFO and weighted average methods of accounting for beginning inventory costs.


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Chapter 10 - Standard Costing: A Managerial Tool 67. The production data needed to calculate the standard unit cost as well as the underlying details for the standard cost per unit are provided provided in a. the standard cost sheet. b. the standard standard productio production n budget budget.. c. the balance sheet. d. the standard work-in-process account. e. None of these. ANSWER: a

68. Standard hours allowed are computed using the equation a. unit labor standard × actual output. b. unit unit labor labor stand standard ard × standard output. c. unit labor standard × actual input. d. unit labor standard × standard input. e. not shown here. here. ANSWER: a

69. The standard quantity of materials allowed is computed by the equation a. unit quantity standard standard × standard output. b. unit unit quanti quantity ty stand standard ard × actual input. c. unit quantity standard standard × standard input. d. unit quantity standard × actual output. e. not shown here. here. ANSWER: d

70. An accountant would refer to a cost sheet to perform which of the following actions? a. Calculate standard cost per unit. b. Calculate Calculate efficiency efficiency variances. variances. c. Calculate the total amount of inputs allowed for the actual output. d. All of these. ANSWER: d


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Chapter 10 - Standard Costing: A Managerial Tool Figure 10-1. Flying High Company manufactures model airplanes. During the month, it manufactured 10,000 airplanes. Each one used an average of 6.5 direct labor hours and an average of 1.5 sheets of aluminum. It normally manufactures 7,500 airplanes. Materials and labor standards for making the airplanes are:

Direct Materials (1 sheet of aluminum @ $10.00) $10.00 Direct Materials (other accessories @ $8.75) 8.75 Direct Labor (6 hours @ $7.00) 42.00 71. Refer to Figure 10-1. Compute the standard hours allowed for a volume of 10,000 airplanes. a. 60,000 hours b. 420, 420,000 000 hours hours c. 70,000 hours d. 65,000 hours ANSWER:

a

RATIONALE: SH = Unit labor standard × Actual output SH = 6 × 10,000 = 60,000.

72. Refer to Figure 10-1. Compute the standard number of sheets of aluminum allowed for a volume of 10,000 airplanes. a. 15,000 sheets b. 10,000 10,000 sheets sheets c. 7,500 sheets d. 11,250 sheets ANSWER:

b

RATIONALE: SQ = Unit quantity standard × Actual output. SQ = 10,000 × 1 = 10,000 sheets.

73. Variances indicate a. that actual performance is not going according to plan. b. the cause of the variance. variance. c. who is responsible for the variance. d. when the variance should be investigated. e. none of these. ANSWER: a

74. The difference between the actual cost of the input and its planned cost is a. the total budget variance. b. the usage variance. variance. c. the price variance. variance. d. the efficiency variance. e. the budget variance. ANSWER: a


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Chapter 10 - Standard Costing: A Managerial Tool 75. Which of the following is true concerning the materials price variance? a. It is the difference between the actual and standard unit price of an input multiplied by the number of inputs used. b. It is the differ difference ence between between the the actual actual and and standard standard unit price of an an output output multiplied multiplied by the the number number of of inputs inputs used. c. It is the difference between the actual and standard unit price of an input multiplied by the number of inputs purchased. purchased. d. It is the difference between the actual and standard unit price of an output multiplied by the number of inputs purchased. purchased. e. None of these. ANSWER: c

76. The usage variance is the difference between the actual and standard quantity of inputs a. multiplied by the standard unit price of the input. b. budgete budgeted d multi multiplie plied d by the standard standard unit price price of of the the input. input. c. multiplied by the actual unit price of the input. d. purchased multiplied by the actual unit price of the input. e. None of these. ANSWER: a

77. Which of the following is true regarding variances? a. Unfavorable variances occur whenever actual prices or actual usage of inputs are greater than standard prices or standard standard usage. usage. b. Favorable Favorable variances variances occur whenever actual prices prices or actual actual usage of inputs inputs are greater greater than standard prices prices or standard usage. c. Unfavorable Unfavorable variances are always credits. d. Favorable variances are always debits. e. None of these. ANSWER: a

78. All of the following are true regarding variance investigation except a. the investigation should be undertaken only if the anticipated benefits are greater than the expected costs. b. managers managers must consider whether a variance variance will recur. c. it is difficult to assess the costs and benefits of variance analysis on a case-by-case basis. d. variances are not investigated unless they are large enough to be of a concern. e. every variance is investigated. ANSWER:

e

RATIONALE: Only material variances are investigated.


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Chapter 10 - Standard Costing: A Managerial Tool 79. Which of the following is not true true concerning control limits? a. Control limits are the top and bottom measures of the allowable range. b. The upp upper er cont control rol limit limit is the standard standard plus the allowabl allowablee devia deviation tion.. c. The lower control limit is the standard minus the allowable deviation. d. In current practice, control limits are set objectively using standard formulas. e. Variances that fall outside the control limits are investigated. ANSWER:

d

RATIONALE: In current practice, control limits are set subjectively, using past experience, judgment, and intuition.

80. Acme Company's standard cost is $500,000. The allowable deviation is ±10%. Its actual costs for three months are January February March

$520,000 $550,000 $575,000

The upper and lower control limits are, respectively, a. $550,000 $550,000 and $450,000 b. $500 $500,00 ,000 0 and $450 $450,00 ,000 0 c. $550,000 $550,000 and $500,000 d. $575,000 and $520,000 ANSWER:

a

RATIONALE: The upper control limit is $550,000 [$500,000 + ($500,000 × 10%)]. The lower control limit is $450,000 [$500,000 − ($500,000 × 10%)]. Figure 10-2. Highland Company's standard cost is $250,000. The allowable deviation is ±10%. Its actual costs for six months are

January $235,000 February 220,000 March 245,000 April 265,000 May 270,000 June 280,000 81. Refer to Figure 10-2. The upper and lower control limits are, respectively, a. $250,000 $250,000 and $225,000 b. $305 $305,00 ,000 0 and $195 $195,00 ,000 0 c. $275,000 $275,000 and $250,000 d. $275,000 and $225,000 ANSWER:

d

RATIONALE: The upper control limit is $275,000 [$250,000 + ($250,000 × 10%)]. The lower control limit is $225,000 [$250,000 − ($250,000 × 10%)].


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Chapter 9 Profit Planning

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