Ch07.doc.doc

Chapter 7 Standard Costing and Variance Analysis Questions A standard cost card is a document that summarizes the direct material, direct labor and overhead standard quantities and prices needed to complete one unit of output. The bill of material specifies the quality and quantity of each raw material needed to complete one unit of output. The standard cost card then assigns standard costs to each raw material in the bill of material to determine the total standard material cost of one unit of output. The operations flow document details all the operations needed to make a unit of output or summarizes the time to make one unit of output. These time details are used to develop standard labor cost and time and overhead rates for production of one unit of output. 2. The quantities shown on a bill of materials are not always the same as those shown on a standard cost card because of allowances made for normal waste and/or spoilage. The bill of materials presents the minimum quantities needed for production; the standard cost card presents the more realistic quantities allowed for production. For materials, the quantity standard will be based on the physical quantities used in the past, engineering studies, improvements expected in handling or usage, and normal waste and spoilage allowances. The quality standard is selected based on a consideration of tradeoffs between higher quality and higher cost of inputs. The analysis should consider the effects of input quality on material yields, final product quality, labor standards, etc. 3. Each total variance can be broken down into a price component and a usage component. All price element variances measure the difference between what was actually spent and what should have been spent for the physical measure of what was actually used. All usage element variances measure the difference between the physical measure of what was actually used and what should have been used, denominated in dollars. For materials, the