Question

1) Describe the importance of standard costs.

2) What factors contribute to an unfavorable volume variance ?

3) At the end of the fiscal year, variances from standard costs are transferred to another account. Name that account.

4) What is an ideal standard ?

5) What is the importance of the direct materials price variance ?

6) What is the importance of the direct materials quantity variance ?

7) What is the importance of the direct labor rate variance ?

8) Compare ROI with Residual Income - what are the advantages and disadvantages of using these methods to measure profitability ?

9) Describe how the Balanced Scorecard can be a useful tool for the management of a business firm

10) Describe the importance of transfer pricing in the transfer of products between divisions

Answer 1

1.) IMPORTANCE OF STANDARD COSTS

Increase the efficiency

Account manager fixes the standard cost of direct material , labour and overheads and pre-determined standard cost increases the efficiency of production , every worker produce goods according to standard cost . After this actual cost is also compare with standard cost . With this comparison , manager will succeed to increase the efficiency of worker for reducing cost .

Effective utilization of resources

Standard costing is also helpful for effective utilization of resources

We can explain this with small example
Suppose , A company purchase following raw material without setting any standard cost .

Name of Item                Actual Cost

x - material                          $ 40000
y - material                          $ 30000
z - material                          $ 20000

Because A company can not set the standard of quantity and rate of raw material cost . It may possible .

• Company has purchased raw material more than current production and extra raw material is the waste of working capital .
• Company does not research the market , it may possible that one supplier can supply same raw material with following cost
  

  Name of Item                Actual Cost
  
  x - material                          $ 35000
  y - material                          $ 20000
  z - material                          $ 15000

Now company will face the total loss due to not utilization his resources effectively and standard costing is only way to effective utilization for reducing cost .

Use in Budgetary Control

Standard costing can also use in budgetary control . We know that budgetary control is the part of management and in controlling , it can be used . In budgetary control , not only standard cost is calculated but after comparing relative actions of improvement are taken . With standard costing , effective control of cost can be possible .

Proper decisions

Standard costing is also helpful for taking proper decisions for deciding cost. There are large number of expenses and there are many alternatives of these expenses . When standard cost is decided at that time , best alternative from different expenses is chosen and it will reduce extra cost burden .

2.)

An unfavorable volume variance indicates that the amount of fixed manufacturingoverhead costs applied (or assigned) to the manufacturer's output was less than the budgeted or planned amount of fixed manufacturing overhead costs for the same time period.

FACTORS CONTRIBUTE TO UNFAVORABLE OH VARIANCE ARE :-

A UNEXPECTED INCREASE IN COST OF UTILITIES

B FAILURE TO MAINTAIN AN EVEN FLOW OF WORK

C MACHINE BREAKDOWN

D FAILURE TO OBTAIN ENOUGH SALES ORDER

3.) COST OF GOODS SOLD ACCOUNT

4.) Ideal standards. in standard costing, are standards that can be achieved only with the highest efficiency and performance (usually under perfect conditions).