Question

1. How does a standard cost accounting system work, and why is it valuable to management? (2) 2. What is a variance? 3. What might cause the following materials variances? i. An unfavorable materials price variance. ii. A favorable materials price variance. iii. An unfavorable materials quantity variance. iv. A favorable materials quantity variance. 4. What might cause the following labor variances? i. An unfavorable labor rate variance. ii. A favorable labor rate variance. iii. An unfavorable labor efficiency variance. iv. A favorable labor efficiency variance.

Answer 1

1) A standard cost can be defined as an expected cost that often a company establishes at the beginning of a fiscal year for prices paid and amounts used for a given product. Thus it is an expected amount paid for costs of materials or rates of labor. A standard cost can be determined with the past history or industry norms. It is prepared after the development of manufacturing standards of direct materials, direct labour and factory overhead.

For example: The direct materials price standard is developed on a careful estimation of all possible increases in price, changes in quantities available, and new supply sources in the next accounting period. It is usually computed as: Standard Direct Materials cost = Expected number of units of raw material * Expected raw materials cost. Thus if considering the previous accounting records we expects 50,000 units @10 per unit, the standard direct materials cost equals $500,000

The main reason for it's usage and importance for managment is that there are a wide range of applications where it is requires loads of time to collect actual costs, thus the standard costs are applied as a close approximation to actual costs. Standard costing system fulfils a number of processes of the company such as planning, control, reporting and recording

2) In accounting, variance refers to difference between a budgeted, planned, or standard cost and the actual costs or income for an activity. Unfavorable variance means when compared to budget, the actual cost/ revenue results to a lower income; actual cost exceeds the budgeted cost; or actual revenue is lower than budgeted revenue. Favorable variances result in vice versa i.e. when standard cost exceeds actual costs

I have answered more than one question