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DQ #1
What are some advantages and disadvantages of standard costs? How do managers determine what the
standard cost should be? Describe the effect of inaccurate standard costs on financial reporting.
"The setting of standard costs to produce a unit of product is a difficult task. It requires input
from all persons who have responsibility for costs and quantities" (Weygandt, et al, 2010, pp
495). To establish the standard cost of producing a product, it is necessary to establish standards
for each manufacturing cost element Direct materials,
Direct labor , and
Manufacturing overhead
The standard for each element is derived from the standard price to be paid and the standard
quantity to be used.
Variances occur when standard and actual costs do not match. Left unchecked, standard costing
can distort the income statement and balance sheet. Failing to adjust the standard cost for
production variances affects the income statement's cost of goods sold account. Companies can
either overstate or understate cost of goods sold. Ending inventory directly relates to errors in the
standard costing process. Similar to cost of goods sold, ending inventory reported on the balance
sheet can have overstatements or understatements.
Reference
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Managerial Accounting Tools for
Business Decision Making (5th ed.). Hoboken, NJ: John Wiley & Sons, Inc..
DQ #2
When should variances be investigated? Who should be responsible for correcting a negative variance?
Why? What are some factors that can lead to variances? How can variances be corrected?