Solutions Chapter 10

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Standard Costing and Performance Measures for Today’s Manufacturing Environment


10-1Management by exception is a managerial technique in which only significant deviations from expected performance are investigated.

10-2Any control system has three basic parts: a predetermined or standard performance level, a measure of actual performance, and a comparison between standard and actual performance. The system works by making the comparison between actual and standard performance and then taking action to bring about a desired consequence.

10-3One method of setting standards is the analysis of historical data. Historical cost data provide an indicator of future costs. The methods for analyzing cost behavior described in Chapter 7 are used to predict future costs on the basis of historical costs. These predictions then form the basis for setting standards. Another method for setting standards is task analysis, which is the analysis of a production process to determine what it should cost to produce a product or service. The emphasis shifts from what the product did cost in the past to what it should cost in the future. An example of task analysis is a time-and-motion study conducted to determine how long each step performed by direct laborers should require.

10-4A perfection (or ideal) standard is the cost expected under perfect or ideal operating conditions. A practical (or attainable) standard is the cost expected under normal operating conditions. Many behavioral scientists question the effectiveness of perfection standards. They feel that employees are more likely to perform well when they strive to achieve an attainable standard than when they strive, often unsuccessfully, to achieve a perfection standard.

10-5A bank could use standards to specify the required amount of time to process a loan application or process a bank transaction.

10-6Standard material prices include the purchase price of the material and any transportation costs incurred to obtain the material. The standard quantity of material is the amount required to be included in the finished product plus an allowance for normal waste expected in the production process.

10-7An unfavorable direct-material price variance means that a higher price was paid for the material than was expected when the standard was set. A favorable variance has the opposite interpretation.

10-8The manager in the best position to influence the direct-material price variance is the purchasing manager.

10-9An unfavorable direct-material quantity variance means that a larger amount of material was used in the production process than should have been used in accordance with the standard. A favorable variance has the opposite interpretation.

10-10The manager in the best position to influence the direct-material quantity variance usually is the production manager.

10-11The direct-material price variance is based on the quantity purchased (PQ). Deviations between the actual and standard price, which are highlighted by the price variance, relate to the purchasing function in the firm. Timely action to follow up a significant price variance is facilitated by calculating this variance as soon as possible after the material is purchased.

The direct-material quantity variance is based on the amount of material used in production (AQ). The quantity variance highlights deviations between the quantity of material actually used (AQ) and the standard quantity allowed (SQ). Therefore, it makes sense to compute this variance at the time the material is used in production.

10-12An unfavorable direct-labor rate variance means that a higher labor rate was paid than was anticipated when the standard was set. One possible cause is that labor rate raises granted were above those anticipated in setting the standards. Another possible cause is that more highly skilled workers were used...
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