After evaluating Null Company’s manufacturing process, management decides to establish standards of 3 hours of direct labor per unit of product and $15 per hour for the labor rate. During October, the company uses 16,250 hours of direct labor at a $247,000 total cost to produce 5,600 units of product. In November, the company uses 22,000 hours of direct labor at a $335,500 total cost to produce 6,000 units of product. Show 1. Compute the direct labor rate variance, the direct labor efficiency variance, and the total direct labor cost variance for each of these two months. Classify each variance as favorable or unfavorable. 2. Interpret the October direct labor variances. Definition: A standard cost is an estimated expense that normally occurs during the production of a product or performance of a service. In other words, this is theoretically the amount of money a company will have to spend to produce a product or perform a service under normal conditions. Standard costs are sometimes referred to as preset costs because they are estimated based on statistics and management’s experience. Basically, management calculates how much each step in the production process should cost based on the market value of goods, median wages paid per employee, and average utility rates. This estimated calculated amount is the standard cost. It’s the amount that the company should have to
pay to produce a good. Management uses these costs in two different ways. First, they use them to plan out future production processes and increase efficiencies. By looking at the preset costs for operations, management can innovate new ways of producing products that don’t require the same procedures–thus, reducing cost. Second, management uses these expenses to determine how reasonable the actual costs were for the period. Since present costs and actual costs are rarely identical,
management can evaluate how close the actual expenses matched what they should have been. This is similar to the budgeting process. If the actual expenses were higher than the preset expenses, the company would have an unfavorable variance. On the other hand, if actual is less than
the standard, the difference is said to be a favorable variance. Management can use these variances twofold. It can evaluate the efficiencies or inefficiencies that led to the variances and adjust them. It can also evaluate the expenses for fraud. For example, if actual material were way above the standard limit, management can investigate why so many raw materials were purchased and whether or not all of the purchases were put into production. This ensures employees aren’t ordering goods and stealing them. Typically, standard costs are divided into three categories: material, labor, and overhead.
 B.Preset costs for delivering a product or service under normal conditions.C.Established by the IMA.D.Rarely achieved.E.Uniform among companies within an industry.AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: C1 Define standard costs and explain how standard cost information is useful for management by exception.Wild - Chapter 21 #3334. The costs that should be incurred under normal conditions to produce a specific product or component or toperform a specific service are:A.Variable costs.B.Fixed costs.C.Standard costs.D.Product costs.E.Period costs.AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: C1 Define standard costs and explain how standard cost information is useful for management by exception.Wild - Chapter 21 #34 We have textbook solutions for you!The document you are viewing contains questions related to this textbook. Managerial Accounting: The Cornerstone of Business Decision-Making Hansen/Mowen Expert Verified 35. Standard costs are used to measure:A.Price and quantity variances.B.Price variances only.C.Quantity variances only.D.Price, quantity, and sales variances.E.Quantity and sales variances.AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: C2 Describe variances and what they reveal about performance.Wild - Chapter 21 #3536. The difference between actual and standard cost caused by the difference between the actual price and thestandard price is called the:A.Standard variance.B.Quantity variance.C.Volume variance.D.Controllable variance.E.Price variance.AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: C2 Describe variances and what they reveal about performance.Wild - Chapter 21 #3637. The difference between actual and standard cost caused by the difference between the actual quantity andthe standard quantity is called the:A.Controllable variance.B.Standard variance.C.Budget variance.D.Quantity variance.E.Price variance.AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: C2 Describe variances and what they reveal about performance.Wild - Chapter 21 #37 38. The difference between the actual cost incurred and the standard cost is called the:A.Flexible variance.B.Price variance.C.Cost variance.D.Controllable variance.E.Volume variance.AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: C2 Describe variances and what they reveal about performance.Wild - Chapter 21 #3839. A process of examining the differences between actual and budgeted costs and describing them in terms ofthe amounts that resulted from price and quantity differences is called:A.Cost analysis.B.Flexible budgeting.C.Variable analysis.D.Cost variable analysis.E.Cost variance analysis.AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBlooms: RememberDifficulty: MediumLearning Objective: C2 Describe variances and what they reveal about performance. Upload your study docs or become a Course Hero member to access this document Upload your study docs or become a Course Hero member to access this document End of preview. Want to read all 129 pages? Upload your study docs or become a Course Hero member to access this document What is meant by the standard costing?What is Standard Costing? Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. Subsequently, variances are recorded to show the difference between the expected and actual costs.
What is the purpose of using standard costs quizlet?Standard costs simplify costing by reducing clerical labor. A complete standard cost system usually is accompanied by standardization of production. As the production process becomes more standardized, clerical effort declines.
When the actual cost is more than standard cost then it is variance?If the actual cost is less than the standard cost or the actual profit is higher than the standard profit, it is called favorable variance. On the contrary, if the actual cost is higher than the standard cost or profit is low, then it is called adverse variance.
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Standard costs are Preset costs for delivering a product or service under normal conditions
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