Chapter 10 Testbank Used For Online Quizzes

Chapter 10 Testbank
Student: ___________________________________________________________________________
1. A control system comprises
A. a predetermined or standard performance level.
B. a measure of actual performance.
C. a comparison between standard and actual performance.
D. All of the given answers
2. A cost variance is
A. the difference between the cost of a product and its selling price.
B. a measure of risk.
C. the difference between the actual cost and the standard cost.
D. the difference between actual costs in two successive time periods.
3. A standard cost is
A. the actual cost of a unit of production.
B. a budget for the production of one unit of a product or service.
C. useful in calculating equivalent units.
D. the average cost within the industry.
4. Which of the following are methods for setting standards?
A. Historical data analysis and cost analysis
B. Task analysis and analysis of historical data
C. Budgetary analysis and data analysis
D. Cost analysis and budgetary analysis
5. Which of the following statements is false concerning the two ways to set standards?
A. Time and motion studies are part of the task analysis method.
B. The usefulness of the historical data analysis method is reduced by changes in production methods.
C. The task analysis method is future oriented rather than past oriented.
D. The task analysis method and the analysis of historical data method cannot be used together.
6. Legacy Company Ltd has determined that 1 unit of its product requires 1.5 hours of direct labour in the assembly
department and 1 hour in the finishing department. Assemblers are paid $8.00 per hour and finishers are paid $9.00 per
hour. Determine the standard labour cost of one unit.
A. $22.50
B. $17.00
C. $20.00
D. $21.00

7. Which of the following statements is false regarding perfection standards?
A. They are attained only under optimum operating conditions.
B. These standards assume peak efficiency, lowest input prices and best quality materials attainable.
C. These standards motivate some employees to achieve the lowest cost possible.
D. The benefits of these standards have been proven and are irrefutable.
8. A standard that assumes a production process is as efficient as practical under normal operating conditions is
A. a perfection standard.
B. an attainable standard.
C. an average standard.
D. an operating standard.
9. Which of the following statements about perfection standards is false?
A. Some managers believe that perfection standards encourage a higher level of performance.
B. Some managers believe that perfection standards discourage workers who may then not perform as well.
C. Some managers believe that perfection standards will encourage workers to sacrifice quality in order to achieve the
quantity standard.
D. Perfection standards are generally accepted by managers as the best type of standard.
10. Which of the following statements is/are true?
A. Many service organisations cannot use standard costing because their services are non-repetitive.
B. Practical standards are also known as attainable standards.
C. Practical standards incorporate a certain amount of inefficiency, such as that caused by an occasional machine
breakdown.
11. A material price variance is shown by
A.
AP(PQ – SQ).
B.
(AP – SP).
C.
PQ (AP – SP).
D. (PQ – SQ) (AP – SP).

12. A material quantity variance is shown by
A.
SP (AQ – SQ).
B.
(SQ) (AQ).
C.
(AQ – SQ).
D.
(AQ – SQ) (AP – SP).
A. The standard cost per unit of materials is used to calculate a materials price variance.
B. The standard cost per unit of materials is used to calculate a materials usage variance.
C. The standard cost per unit of materials cannot be determined until the end of the period.
D.
The standard cost per unit of materials is used to calculate a materials price variance AND the standard cost per unit of materials is
used to calculate a materials usage variance.
14. Which department typically is responsible for an unfavourable materials price variance?
A. Purchasing
B. Engineering
C. Production
D. Receiving

15. A labour rate variance is shown by
A.
AH (AR – SR).
B.
(AH – SH),
C.
(AH – SH) (AR – SR),
D.
AR (AH – SH),
16. A labour efficiency variance is shown by
A.
(AR) (AR).
B.
SR (AH – SH).
C.
(AH – SH).
D.
AH (AR – SR).
A. The standard direct labour hours per unit of output are used to calculate a labour rate variance.
B. The standard direct labour hours per unit of output are used to calculate a labour efficiency variance.
C. The standard direct labour hours per unit of output cannot be determined until the end of the period.
D. All of the given answers.
18. An unfavourable labour efficiency variance indicates that
A. standard hours exceed actual hours.
B. actual hours exceed standard hours.
C. standard rate times standard hours exceeds actual rate times actual hours.
D. actual rate exceeds standard rate.

19.
Given the following information, calculate the materials price variance:

A. $2800 (F)
B. $2800 (U)
C. $6000 (U)
D. $6000 (F)

20.
Given the following information, calculate the direct labour rate variance.

A. $17 250 (U)
B. $20 700 (U)
C. $21 000 (F)
D. $20 700 (F)

21.
The following data relates to QA firm.
Cost standards:

Actual results:
7800 units were produced.

Calculate the direct material quantity variance.

A. $750 (F)
B. $800 (F)
C. $750 (U)
D. $780 (F)

22.
Cost standards:

Actual results:

Calculate the direct material price variance, based on the quantity of materials purchased.

A. $2310 (U)
B. $2500 (U)
C. $2500 (F)
D. $2000 (U)

23.
The following data relates to QA firm:
Cost standards:

Actual results:


A. $2310 (F)
B. $2310 (U)
C. $2500 (U)
D. $2500 (F)

24.
Cost standards:

Actual results:

Calculate the direct labour rate variance.

A. $8010 (F)
B. $8000 (U)
C. $8020 (F)
D. $7800 (F)

25.
Cost standards:

Actual results:

Calculate the labour efficiency variance.

A. $8000 (F)
B. $8000 (U)
C. $8250 (U)
D. $8250 (F)

26.
I Wear Optometry determined the following variances had occurred during the month of September:

The company made 1600 pairs of eyeglasses during the month using 2000 direct labour hours. The standard wage rate per hour is
$14.50. Determine the standard wages for September's output.

A. $22 750
B. $34 800
C. $29 000
D. $23 200

27.

$14.50. What is the number of standard hours allowed for one pair of eyeglasses?

A. 1 hour
B. 1600 hours
C. 1 hour 15 minutes
D. Insufficient data to determine

28. Cultco Company Ltd has set the following direct material standards per unit of product: 2.5 kg @ $3.00 per kg; $7.50
per unit. During April, actual direct material purchased and used amounted to 8000 kg at a cost of $3.10 per kg. Actual
production amounted to 3000 units. Determine Cultco's direct material price variance.
A. $1500 (U)
B. $800 (U)
C. $750 (U)
D. $500 (U)
production amounted to 3000 units. Determine Cultco's direct material quantity variance.
A. $2300 (U)
B. $1500 (U)
C. $800 (U)
D. $500 (U)
production amounted to 3000 units. Determine the total material variance.
A. $2300 (U)
B. $11 500 (U)
C. $800 (U)
D. $750 (U)
31. Twister Pty Ltd has set direct labour standards of 3 hours per unit and $5 per hour. During the month 2900 hours at a
total cost of $17 400 were used to produce 1000 units. Determine the direct labour efficiency variance.
A. $100 (F)
B. $100 (U)
C. $500 (F)
D. $500 (U)
total cost of $17 400 were used to produce 1000 units. Determine the direct labour price variance.
A. $2400 (U)
B. $2400 (F)
C. $2900 (U)
D. $2900 (F)
total cost of $17 400 were used to produce 1000 units. Determine the total direct labour variance.
A. $2400 (F)
B. $2900 (F)
C. $2900 (U)
D. $2400 (U)

34. Management by exception is best defined as
A. controlling actions of subordinates through acceptance by them of management techniques.
B. investigating unfavourable variances.
C. devoting management time to follow up only on significant variances.
D. controlling costs so that non-zero variances are quite exceptional.
35. When considering the significance of cost variances, managers should not consider
A. relative size of the variances.
B. recurring variances.
C. the trends of the variances.
D. favourable or unfavourable status of the variances.
36. What is the most viable rule of thumb for choosing variances that should be investigated?
A. Greater than $10 000 or greater than 10 per cent of standard cost
B. Greater than 50 per cent of standard
C.
Never investigate favourable variances
D.
Always investigate unfavourable variances
37. A direct labour efficiency variance cannot be caused by
A. producing fewer finished units than originally planned.
B. poor quality raw materials.
C. employee inefficiency.
D. an out-of-date labour time standard.
38. Which of the following statements regarding standard costing is/are true?
A. Standard costing is useful in diagnosing organisational performance.
B. Standard costing is useful in performance appraisal.
C. Standard costing is useful in determining employee pay bonuses.
39. Which of the following statements regarding variances is/are true?
The actions that create a favourable direct material price variance
i. can result in an unfavourable direct material quantity variance
ii. are likely to create an unfavourable direct labour rate variance
iii. can result in an unfavourable direct labour efficiency variance
A. i
B. i and ii
C. i and iii
D. ii and iii

40. The manager generally responsible for the direct material price variance is the
A. sales manager.
B. production supervisor.
C. purchasing manager.
D. personnel manager.
41. The production supervisor generally does not influence the
A. direct material quantity variance.
B. direct labour rate variance.
C. direct labour efficiency variance.
D. direct material price variance.
42.
Which of the following statements is false?

A. Standard costs are used for product costing.
B. Standard costs provide a benchmark against which actual costs can be compared.
C. Standard costs are actual costs.
D. Standard costs are used for control.

43. Under a standard costing system
A. standard costs are entered into the work in process and finished goods inventory account.
B. actual costs are entered into work in process inventory account while standard costs are entered into the finished
goods account.
C. the raw material inventory account is based on standard quantities and standard cost.
D. actual costs are entered into raw material and work in process inventory account.
A. Variances are temporary accounts.
B. Variance accounts may be closed to cost of goods sold.
C. Favourable variances are recorded as a credit entry.
45. If Company XYZ purchased 30 000 kg of brass metal at an actual price of $7.10 per kg (standard price is $7.00 per
kg), the entry to the direct material price variance should be
A. $3000 debit.
B. $3000 credit.
C. $1500 debit.
D. $1500 credit.
46. Which of the following journal entries correctly represents the recording of an unfavourable material price variance?
A. Direct material debit, materials price variance and accounts payable credit.
B. Direct material and materials price variance debit, accounts payable credit.
C. Direct material debit, work in process and accounts payable credit.
D. Direct materials debit, accounts payable credit.

47. A company using a standard costing system uses an actual quantity of 1100 kg of material at an actual cost of $1.20
per kg. The standard quantity allowed was 1000 kg at a standard cost of $1.00 per kg. After the goods are completed and
transferred from work in process inventory, what is the cost of direct material that would appear in finished goods
inventory?
A. $1000
B. $1100
C. $1200
D. $1320
48. A company using a standard costing system uses an actual quantity of 520 direct labour hours at an actual cost of
$5.90 per hour. The direct labour hours quantity allowed was 500 hours at a standard cost of $6.00 per hour. What is the
cost of direct labour that would appear in work in process inventory?
A. $3068
B. $3120
C. $2950
D. $3000
49. A favourable labour rate variance leads to a
A. credit to the labour rate variance account.
B. debit to the labour rate variance account.
C. larger than standard debit to work in process.
D. None of the given answers
50.
Flexer Company Ltd has set the following standards for the production of one unit of product. Normal production each month is 500
units.

During June, actual production amounted to 420 units. All direct material was purchased and used this month. Actual cost amounted
to:

Determine the direct material price for June production.

A. $875 (U)
B. $840 (F)
C. $840 (U)
D. $875 (F)

51.
units.

to:

Determine the standard material quantity allowed for June production.

A. 4000 kg
B. 8 kg
C. 3360 kg
D. 3500 kg

52.
units.

to:

Determine the direct material quantity variance for June production.

A. $35 (U)
B. $875 (U)
C. $910 (U)
D. $875 (F)

53.
units.

to:

Determine the direct labour rate variance for June production.

A. $280 (U)
B. $172 (U)
C. $200 (U)
D. $168 (U)

54.
units.

to:

Determine the direct labour efficiency variance for June production.

A. $452 (U)
B. $172 (U)
C. $280 (U)
D. $284 (F)

55.
units.

to:

Determine the standard direct labour hours allowed for June production.

A. 2000 hours
B. 1720 hours
C. 420 hours
D. 1680 hours

56. Which of the following statements is false?
A. Standard cost systems use budgeted costs of direct material and direct labour.
B. Variances provide a means of performance evaluation and rewards for employees.
C. A standard costing system is usually more expensive than an actual costing system.
D. Variances provide motivation for employees to adhere to standards.
A. Unfavourable variances represent the costs of producing inefficiently.
B. Unfavourable variances (after closing to cost of goods sold) cause cost of goods sold to be higher.
C. Unfavourable variances are recorded as a credit entry.
D. Significant unfavourable variances should be investigated by managers.
58. Which of the following statements is/are false?
A. All favourable variances represent the costs of producing efficiently.
B. Favourable variances (after closing to cost of goods sold) cause cost of goods sold to be lower.
C. Significant favourable variances do not need to be investigated by managers.
D. All favourable variances represent the costs of producing efficiently AND significant favourable variances do not need
to be investigated by managers.
59. Which of the following statements is true with regard to variances requiring investigation?
i. Favourable variances do not need to be investigated.
ii. Large variances should be investigated.
iii. Consistent trends in variances should be investigated.
A. i
B. ii
C. i and ii
D. ii and iii

60. A firm's purchasing manager bought poor quality material at a large saving. Because of the lower quality of material,
more scrap was produced and because of the extra labour hours required an additional employee had to be hired to
assist in the cutting operation. Assuming only the facts given, what variance(s) would result?
A. Favourable material price
B. Favourable material price; unfavourable material quantity; unfavourable labour efficiency
C. Favourable material price; unfavourable material quantity; unfavourable labour efficiency; unfavourable labour rate
D. Favourable material price; unfavourable labour efficiency
61. For a particular period a firm worked a larger number of overtime hours than planned in order to complete a larger
than usual number of job orders. The jobs were all completed within the standard time allowed for each job. Assuming
only the facts given, what variance(s) would result from these facts?
A. Unfavourable labour rate; unfavourable labour efficiency
B. Unfavourable labour efficiency; unfavourable material quantity variance
C. Unfavourable labour rate; unfavourable labour efficiency; unfavourable material quantity
62. Which of the following statements is a definition of standard quantity of direct materials allowed for a period? Standard
quantity of direct materials is
A. the number of units of material that should have been used for expected (budgeted) production.
B. the number of units of material that were used for actual production.
C. the number of units of material that should have been used for actual production.
D. the number of units of material required for each unit of production.
63.
A particular firm with zero material inventory purchased 30 000 kg of material and used 25 000 kg. For control purposes, it is
recommended that firms calculate the material price variance at the time of purchase. The variance could alternatively be calculated at
the time of usage of that material. Which of the following statements most correctly reflects a comparison of the two methods for this
firm?

A. Whether calculated on purchase or usage, both variances will be favourable.
B. Whether calculated on purchase or usage, both variances will be unfavourable.
C. The variance calculated on purchase will be larger than the variance calculated on usage, but in the same direction
(favourable/unfavourable).
D. The variance calculated on purchase will be smaller than the variance calculated on usage, but in the same direction

64. In which of the following circumstances would it be acceptable to record the material price variance at the time of
usage of the materials?
A. Where a fixed contract price is in place for the purchase of materials for a period.
B. Where the purchasing manager is held accountable for all material price variances.
C. Where the purchasing manager has little control over the price paid.
D. Both where a fixed contract price is in place for the purchase of materials for a period AND where the purchasing
manager has little control over the price paid.

65. Which of the following statements regarding allowances for spoilage and/or inefficiency is not correct?
A. When allowances are not included within the standards, any inefficiencies are highlighted as unfavourable variances.
B. When allowances are not included within the standards, any inefficiencies are highlighted as favourable variances.
C. Firms would never set standards that included an allowance for spoilage.
D. When allowances are not included within the standards, any inefficiencies are highlighted as favourable variances AND
firms would never set standards that included an allowance for spoilage.
66. A department's budgeted output for a 4-week period was 500 units at a standard cost of $100 per unit. The actual
production was 450 units and the firm's ledger revealed actual costs for the month to be $50 200. The standard production
cost for the period is
A. $50 000.
B. $50 200.
C. $45 000.
D. insufficient information to determine.
67. When material price variances are recognised at the time of material purchase, direct materials used are
A. credited to the materials account at standard cost.
B. debited to the work in process account at actual prices.
C. credited to the materials account at actual cost.
D. debited to the materials account at standard cost.
68. A material price variance of $5000 (unfavourable) for a period has been calculated. The actual unit price was $9.00.
The actual quantity of material used was 6000. The standard quantity of materials was 5000. Calculate the standard unit
price for a unit of raw materials for the period (round where necessary).
A. $5.00
B. $8.00
C. $8.17
D. $9.83
69. Which of the following could not be an explanation of the labour efficiency variance for a firm whose variances for the
period included an unfavourable material price variance and a favourable labour efficiency variance?
A. Standards are out of date.
B. If the unfavourable material price variance was due to better quality materials being purchased, this in turn could lead
to less waste of materials.
C. A timesaving improvement to the material-handling techniques has not yet been incorporated into the standard.
D. Deliberate inefficiency.

70.
Selected data about a firm's materials follows.

What amount would be debited to materials account for the purchase of material?

A. $780
B. $750
C. $720
D. $810

71.

What amount would be debited to work in process account for materials used?

A. $660
B. $630
C. $600

72. When using the statistical control chart to investigate variances
A. managers should only investigate variances that are beyond the critical value.
B. managers should only investigate variances that are fall below the critical value over a number of consecutive periods.
C. any variances that go beyond the critical values are likely to be the result of random events such as employee illness.
D. managers should estimate the critical values by averaging the variances over a number of periods.
73. Jasmine Morron is examining a statistical control chart on the recent cost report of her manufacturing company.
Jasmine is focusing on one specific process, the labour efficiency variance of polishing. She determines that the critical
values for this process are $1000. Which of the following statements is correct?
A. Jasmine should investigate only unfavourable variances that are larger than $1000.
B. Any variances of less than $1000 are likely to be the result of random events.
C. Jasmine should investigate unfavourable variances of any size, and favourable variances that are larger than $1000.
D. Jasmine should investigate any variances that are larger than $500.

values for this process are $1000. The labour efficiency variances for the last 6 months were all favourable: $500F (July),
$600F (August), $750F (September), $880F (October), $900F (November) and $990F (December). Jasmine decides not
to investigate these variances. Do you agree with her decision?
A. Yes, because all the variances are below the critical value.
B. Yes, because all the variances are below the critical value and are favourable.
C. No, because there is a trend of the variances increasing steadily over time.
D. No, she should investigate the variances in November and December because they are both within 10% of the critical
value.
75. Jay Bole is in the process of developing a standard for the labour cost of one unit of Product X. According to the
design manual, it takes a skilled worker 30 minutes to produce one unit of Product X when the workshop is operating at
peak condition. However, Product X is quite complex and even a skilled worker operating in high efficiency often needs
another 5 minutes to adjust the tools, re-oil the machine and rework some aspects of the product. A skilled worker is paid
$30 per hour, while the company pays 20 per cent on-costs on top of this.
Jay decides to develop a perfection standard. The standard labour cost for one unit of Product X is
A. $15.
B. $17.50.
C. $18.
D. $21.
peak condition. However, Product X is quite complex, and even a skilled worker operating in high efficiency often needs
another 5 minutes to adjust the tools, re-oil the machine, and rework some aspects of the product. A skilled worker is paid
Jay decides to develop a practical standard. The standard labour cost for one unit of Product X is
A. $15.
B. $17.50.
C. $18.
D. $21.
77. When developing a perfection standard for direct labour, a manager should include which of the following?
i Labour on-costs
ii Occasional inefficiencies and machine breakdowns
iii A minimal acceptable idle time
A. i
B. i and ii
C. iii
D. i and iii
78. Dexter Surgical Tools has set the following direct labour standard: 0.5 hours at $20 per hour, for each unit of Tool #11.
The company plans to produce 1200 units of Tool #11 in July; however, the actual production was 1000 units and only
900 units were actually sold. The actual labour cost for July was $22 per hour.
The labour efficiency variance for July was
A. $1200 Favourable.
B. $1200 Unfavourable.
C. $1000 Favourable.
D. $1000 Unfavourable.

Which of the following is a likely explanation for the July labour efficiency variance?
A. The standard was set incorrectly.
B. A machine breakdown has resulted in unanticipated inefficiencies.
C. The production level was smaller than expected.
D. Both incorrectly set standards and a machine breakdown are likely explanations.
80. Dexter Surgical Tools has set the following perfection direct labour standard: 0.5 hours at $20 per hour, for each unit
of Tool #11. The company plans to produce 1200 units of Tool #11 in July; however, the actual production was 1000 units
and only 900 units were actually sold. The actual labour cost for July was $22 per hour.
If Dexter Surgical Tools decides to use a practical standard instead of the perfection standard, the labour efficiency
variance is likely to
A. remain unchanged.
B. increase.
C. decrease.
D. not enough information.
81. Companies sometimes develop standards based on historical data. Which of the following statements about this
approach is correct?
A. This is an appropriate approach for mature production process.
B. This is an appropriate approach for processes that are labour intensive.
C. This is an inappropriate approach because it is a relatively more expensive approach to standard setting.
D. This approach is only acceptable for manufacturing companies.
82. Which of the following is not a desired outcome from allowing managers to participate in the setting of standards?
A. Greater confidence in the accuracy of the standard
B. Increased commitment to standards
C. Easily attained standards
83. When a manager receives a bonus based on meeting the standards and achieving increased efficiencies which of the
following could be an undesired outcome?
A. Increased profit
B. Satisfied customers
C. Reduced employee theft
D. Lower quality raw materials
84. Standard costs can be used for
A. controlling costs and products.
B. controlling budgets and products.
C. control and products.
D. control and product costing.

85. In a standard costing system all inventories are recorded at
A. actual cost.
B. standard cost.
C. budgeted cost.
D. purchase cost.
86. As production takes place, the product costs are added to the
A. raw materials inventory account.
B. work in process inventory account.
C. finished goods inventory account.
D. cost of goods sold account.
87. An debit balance in the direct material price variance account or direct labour price variance accounts would cause the
costs of goods sold to
A. increase.
B. decrease.
C. stay the same.
D. have no impact.
88.
Usefulness of standard costs in controlling costs

Standard costs are said to be useful in controlling costs. Assume that the standard cost for raw materials per unit of finished product is
$6.00 based on 3 kg at $2.00 per kg.
i. Explain how such a standard can be used to evaluate performance.
ii. Why is the degree of controllability important in utilising standard costs to evaluate performance?

89.
Motivational effects of standard cost systems

Standard cost systems can have motivational effects; some are desirable, some are not. Consider the following situation:
The materials purchasing manager is paid a salary plus a bonus based on the net favourable materials price variance. Generally, this
bonus amounts to 30 to 40 per cent of the manager's total compensation. Due to the bankruptcy of a company in a related field, there is
an opportunity to buy a key raw material. The standards for this material call for grade AA, usually purchased for $56 per tonne.
Because of the bankruptcy, the company can obtain grade AAAA for $62 per tonne. While the quality of the final product will be the
same regardless of the grade of raw material used, there will be substantial savings in production if the grade AAAA material is used.
These savings are expected to be two to three times the additional cost of $6 per tonne.
i. How would an unfavourable price variance on a particular purchase affect the overall price variance for the year?
ii. Will the use of the materials price variance to provide a bonus to the purchasing manager lead to a desirable or undesirable
behavioural outcome? Explain.

90.
Interaction of materials and labour variances

For the quarter just ended, BoSan Pty Ltd reported the following variances in one of its manufacturing departments:

The sum of the favourable variances above exceeded the unfavourable materials price variance by a considerable amount. The quality
of the output from the department was the same as usual. Practically all of the raw material used in this quarter was purchased in this
quarter.
Is there any connection between these variances? If so, explain.

91.
Cost flow: standard system versus normal system

How does the flow of costs in a standard cost system differ from the flow in a normal cost system?

92. Explain how practical standards the attitude of managers and their willingness to commit to the set standards.

93. In general, it is felt that theoretical standards do not motivate employees to achieve goals, as employees are aware
that the standards set are virtually impossible to achieve.
True False
94. It is possible to set standards by benchmarking against better performing companies in
the industry.
True False
95. When investigating variances, management are more likely to investigate those costs that are uncontrollable.
True False
96. Variance analysis is used to evaluate actual performance by analysing the differences between standard and actual
costs.
True False
97. Five kilograms at a cost of $7 per kilogram and 2 hours @ $32 per hour are examples of standard costs for the
production of a product.
True False
98. Standard costs are used for evaluating performance and controlling costs but they are never used for costing
products.
True False

99. Variances are used for control purposes by highlighting problem areas, such as using too many materials, so that
corrective action can be taken.
True False
100. When using a standard costing system for recoding purposes, most companies will close the variance accounts by
debiting finished goods.
True False
101. Production managers are usually in the best position to influence labour rates, labour usage and material prices.
True False
102. In setting standards, it is common to carry out time and motion studies to determine how long it should take workers
to perform a particular process.
True False
103. When estimating the cost of an economic quantity of a raw materials, any discounts for the bulk order are included in
the estimated price.
True False
104. When a variance is identified as insignificant, managers need to find out the cause of the variance.
True False
105. Product costs can be used in both financial and management accounting.
True False

Chapter 10 Testbank Key

1. A control system comprises
A. a predetermined or standard performance level.
B. a measure of actual performance.
C. a comparison between standard and actual performance.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.01 Explain how standard costing can be used to help control costs and manage resources more effectively
2. A cost variance is
A. the difference between the cost of a product and its selling price.
B. a measure of risk.
C. the difference between the actual cost and the standard cost.
D. the difference between actual costs in two successive time periods.
AACSB: Reflective
Difficulty: Easy
3. A standard cost is
A. the actual cost of a unit of production.
B. a budget for the production of one unit of a product or service.
C. useful in calculating equivalent units.
D. the average cost within the industry.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.02 Describe the analysis of historical data and engineering methods of setting standards
4. Which of the following are methods for setting standards?
A. Historical data analysis and cost analysis
B. Task analysis and analysis of historical data
C. Budgetary analysis and data analysis
D. Cost analysis and budgetary analysis
AACSB: Reflective
Difficulty: Easy
5. Which of the following statements is false concerning the two ways to set standards?
A. Time and motion studies are part of the task analysis method.
B. The usefulness of the historical data analysis method is reduced by changes in production methods.
C. The task analysis method is future oriented rather than past oriented.
D. The task analysis method and the analysis of historical data method cannot be used together.
AACSB: Reflective
Difficulty: Easy
6. Legacy Company Ltd has determined that 1 unit of its product requires 1.5 hours of direct labour in the assembly
department and 1 hour in the finishing department. Assemblers are paid $8.00 per hour and finishers are paid $9.00 per
hour. Determine the standard labour cost of one unit.
A. $22.50
B. $17.00
C. $20.00
D. $21.00
AACSB: Analytical
Difficulty: Easy
Learning Objective: 10.04 Develop standard costs for direct material and direct labour
7. Which of the following statements is false regarding perfection standards?
A. They are attained only under optimum operating conditions.
B. These standards assume peak efficiency, lowest input prices and best quality materials attainable.
C. These standards motivate some employees to achieve the lowest cost possible.
D. The benefits of these standards have been proven and are irrefutable.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 10.03 Explain how the use of perfection standards and practical standards may impact behaviour
8. A standard that assumes a production process is as efficient as practical under normal operating conditions is
A. a perfection standard.
B. an attainable standard.
C. an average standard.
D. an operating standard.
AACSB: Reflective
Difficulty: Easy
9. Which of the following statements about perfection standards is false?
A. Some managers believe that perfection standards encourage a higher level of performance.
B. Some managers believe that perfection standards discourage workers who may then not perform as well.
C. Some managers believe that perfection standards will encourage workers to sacrifice quality in order to achieve the
quantity standard.
D. Perfection standards are generally accepted by managers as the best type of standard.
AACSB: Reflective
Difficulty: Easy
A. Many service organisations cannot use standard costing because their services are non-repetitive.
B. Practical standards are also known as attainable standards.
C. Practical standards incorporate a certain amount of inefficiency, such as that caused by an occasional machine
breakdown.
AACSB: Reflective
Difficulty: Medium
11. A material price variance is shown by
A.
AP(PQ – SQ).
B.
(AP – SP).
C.
PQ (AP – SP).
D. (PQ – SQ) (AP – SP).

AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.05 Calculate and interpret the direct material price and quantity variances, and the direct labour rate and efficiency variances
12. A material quantity variance is shown by
A.
SP (AQ – SQ).
B.
(SQ) (AQ).
C.
(AQ – SQ).
D.
(AQ – SQ) (AP – SP).
AACSB: Reflective
Difficulty: Easy
A. The standard cost per unit of materials is used to calculate a materials price variance.
B. The standard cost per unit of materials is used to calculate a materials usage variance.
C. The standard cost per unit of materials cannot be determined until the end of the period.
D.
The standard cost per unit of materials is used to calculate a materials price variance AND the standard cost per unit of materials is
used to calculate a materials usage variance.
AACSB: Reflective
Difficulty: Easy
14. Which department typically is responsible for an unfavourable materials price variance?
A. Purchasing
B. Engineering
C. Production
D. Receiving
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.08 Understand how control can be achieved through assigning responsibility for certain variances to particular managers
15. A labour rate variance is shown by
A.
AH (AR – SR).
B.
(AH – SH),
C.
(AH – SH) (AR – SR),
D.
AR (AH – SH),
AACSB: Reflective
Difficulty: Easy
16. A labour efficiency variance is shown by
A.
(AR) (AR).
B.
SR (AH – SH).
C.
(AH – SH).
D.
AH (AR – SR).
AACSB: Reflective
Difficulty: Easy
A. The standard direct labour hours per unit of output are used to calculate a labour rate variance.
B. The standard direct labour hours per unit of output are used to calculate a labour efficiency variance.
C. The standard direct labour hours per unit of output cannot be determined until the end of the period.
AACSB: Reflective
Difficulty: Easy
18. An unfavourable labour efficiency variance indicates that
A. standard hours exceed actual hours.
B. actual hours exceed standard hours.
C. standard rate times standard hours exceeds actual rate times actual hours.
D. actual rate exceeds standard rate.
AACSB: Reflective
Difficulty: Medium
19.
Given the following information, calculate the materials price variance:

A. $2800 (F)
B. $2800 (U)
C. $6000 (U)
D. $6000 (F)

AACSB: Analytical
Difficulty: Medium
20.
Given the following information, calculate the direct labour rate variance.

A. $17 250 (U)
B. $20 700 (U)
C. $21 000 (F)
D. $20 700 (F)

AACSB: Analytical
Difficulty: Easy
21.
Cost standards:

Actual results:

Calculate the direct material quantity variance.

A. $750 (F)
B. $800 (F)
C. $750 (U)
D. $780 (F)

AACSB: Analytical
Difficulty: Easy
22.
Cost standards:

Actual results:


A. $2310 (U)
B. $2500 (U)
C. $2500 (F)
D. $2000 (U)

AACSB: Analytical
Difficulty: Easy
23.
The following data relates to QA firm:
Cost standards:

Actual results:


A. $2310 (F)
B. $2310 (U)
C. $2500 (U)
D. $2500 (F)

AACSB: Analytical
Difficulty: Easy
24.
Cost standards:

Actual results:

Calculate the direct labour rate variance.

A. $8010 (F)
B. $8000 (U)
C. $8020 (F)
D. $7800 (F)

AACSB: Analytical
Difficulty: Easy
25.
Cost standards:

Actual results:

Calculate the labour efficiency variance.

A. $8000 (F)
B. $8000 (U)
C. $8250 (U)
D. $8250 (F)

AACSB: Analytical
Difficulty: Easy
26.

$14.50. Determine the standard wages for September's output.

A. $22 750
B. $34 800
C. $29 000
D. $23 200

AACSB: Analytical
Difficulty: Medium
27.

$14.50. What is the number of standard hours allowed for one pair of eyeglasses?

A. 1 hour
B. 1600 hours
C. 1 hour 15 minutes
D. Insufficient data to determine

AACSB: Analytical
Difficulty: Medium
production amounted to 3000 units. Determine Cultco's direct material price variance.
A. $1500 (U)
B. $800 (U)
C. $750 (U)
D. $500 (U)
AACSB: Analytical
Difficulty: Medium
production amounted to 3000 units. Determine Cultco's direct material quantity variance.
A. $2300 (U)
B. $1500 (U)
C. $800 (U)
D. $500 (U)
AACSB: Analytical
Difficulty: Medium
production amounted to 3000 units. Determine the total material variance.
A. $2300 (U)
B. $11 500 (U)
C. $800 (U)
D. $750 (U)
AACSB: Analytical
Difficulty: Hard
total cost of $17 400 were used to produce 1000 units. Determine the direct labour efficiency variance.
A. $100 (F)
B. $100 (U)
C. $500 (F)
D. $500 (U)
AACSB: Analytical
Difficulty: Easy
total cost of $17 400 were used to produce 1000 units. Determine the direct labour price variance.
A. $2400 (U)
B. $2400 (F)
C. $2900 (U)
D. $2900 (F)
AACSB: Analytical
Difficulty: Easy
total cost of $17 400 were used to produce 1000 units. Determine the total direct labour variance.
A. $2400 (F)
B. $2900 (F)
C. $2900 (U)
D. $2400 (U)
AACSB: Analytical
Difficulty: Medium
34. Management by exception is best defined as
A. controlling actions of subordinates through acceptance by them of management techniques.
B. investigating unfavourable variances.
C. devoting management time to follow up only on significant variances.
D. controlling costs so that non-zero variances are quite exceptional.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.06 Explain several methods that can be used for assessing the significance of standard cost variances
35. When considering the significance of cost variances, managers should not consider
A. relative size of the variances.
B. recurring variances.
C. the trends of the variances.
D. favourable or unfavourable status of the variances.
AACSB: Reflective
Difficulty: Medium
36. What is the most viable rule of thumb for choosing variances that should be investigated?
A. Greater than $10 000 or greater than 10 per cent of standard cost
B. Greater than 50 per cent of standard
C.
Never investigate favourable variances
D.
Always investigate unfavourable variances
AACSB: Reflective
Difficulty: Easy
37. A direct labour efficiency variance cannot be caused by
A. producing fewer finished units than originally planned.
B. poor quality raw materials.
C. employee inefficiency.
D. an out-of-date labour time standard.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 10.07 Understand how to determine the causes of variances, and when to take corrective actions
38. Which of the following statements regarding standard costing is/are true?
A. Standard costing is useful in diagnosing organisational performance.
B. Standard costing is useful in performance appraisal.
C. Standard costing is useful in determining employee pay bonuses.
AACSB: Reflective
Difficulty: Easy
39. Which of the following statements regarding variances is/are true?
The actions that create a favourable direct material price variance
i. can result in an unfavourable direct material quantity variance
ii. are likely to create an unfavourable direct labour rate variance
iii. can result in an unfavourable direct labour efficiency variance
A. i
B. i and ii
C. i and iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
40. The manager generally responsible for the direct material price variance is the
A. sales manager.
B. production supervisor.
C. purchasing manager.
D. personnel manager.
AACSB: Reflective
Difficulty: Easy
41. The production supervisor generally does not influence the
A. direct material quantity variance.
B. direct labour rate variance.
C. direct labour efficiency variance.
D. direct material price variance.
AACSB: Reflective
Difficulty: Medium
42.
Which of the following statements is false?

A. Standard costs are used for product costing.
B. Standard costs provide a benchmark against which actual costs can be compared.
C. Standard costs are actual costs.
D. Standard costs are used for control.

AACSB: Reflective
Difficulty: Medium
Learning Objective: 10.11 Prepare journal entries to account for direct material and direct labour cost variances
43. Under a standard costing system
A. standard costs are entered into the work in process and finished goods inventory account.
B. actual costs are entered into work in process inventory account while standard costs are entered into the finished
goods account.
C. the raw material inventory account is based on standard quantities and standard cost.
D. actual costs are entered into raw material and work in process inventory account.
AACSB: Reflective
Difficulty: Easy
A. Variances are temporary accounts.
B. Variance accounts may be closed to cost of goods sold.
C. Favourable variances are recorded as a credit entry.
AACSB: Reflective
Difficulty: Easy
45. If Company XYZ purchased 30 000 kg of brass metal at an actual price of $7.10 per kg (standard price is $7.00 per
kg), the entry to the direct material price variance should be
A. $3000 debit.
B. $3000 credit.
C. $1500 debit.
D. $1500 credit.
AACSB: Analytical
Difficulty: Easy
46. Which of the following journal entries correctly represents the recording of an unfavourable material price variance?
A. Direct material debit, materials price variance and accounts payable credit.
B. Direct material and materials price variance debit, accounts payable credit.
C. Direct material debit, work in process and accounts payable credit.
D. Direct materials debit, accounts payable credit.
AACSB: Reflective
Difficulty: Easy
47. A company using a standard costing system uses an actual quantity of 1100 kg of material at an actual cost of $1.20
per kg. The standard quantity allowed was 1000 kg at a standard cost of $1.00 per kg. After the goods are completed and
transferred from work in process inventory, what is the cost of direct material that would appear in finished goods
inventory?
A. $1000
B. $1100
C. $1200
D. $1320
AACSB: Reflective
Difficulty: Easy
48. A company using a standard costing system uses an actual quantity of 520 direct labour hours at an actual cost of
$5.90 per hour. The direct labour hours quantity allowed was 500 hours at a standard cost of $6.00 per hour. What is the
cost of direct labour that would appear in work in process inventory?
A. $3068
B. $3120
C. $2950
D. $3000
AACSB: Reflective
Difficulty: Easy
49. A favourable labour rate variance leads to a
A. credit to the labour rate variance account.
B. debit to the labour rate variance account.
C. larger than standard debit to work in process.
AACSB: Reflective
Difficulty: Easy
50.
units.

to:

Determine the direct material price for June production.

A. $875 (U)
B. $840 (F)
C. $840 (U)
D. $875 (F)

AACSB: Analytical
Difficulty: Easy
51.
units.

to:

Determine the standard material quantity allowed for June production.

A. 4000 kg
B. 8 kg
C. 3360 kg
D. 3500 kg

AACSB: Analytical
Difficulty: Easy
52.
units.

to:

Determine the direct material quantity variance for June production.

A. $35 (U)
B. $875 (U)
C. $910 (U)
D. $875 (F)

AACSB: Analytical
Difficulty: Easy
53.
units.

to:

Determine the direct labour rate variance for June production.

A. $280 (U)
B. $172 (U)
C. $200 (U)
D. $168 (U)

AACSB: Analytical
Difficulty: Easy
54.
units.

to:

Determine the direct labour efficiency variance for June production.

A. $452 (U)
B. $172 (U)
C. $280 (U)
D. $284 (F)

AACSB: Analytical
Difficulty: Easy
55.
units.

to:

Determine the standard direct labour hours allowed for June production.

A. 2000 hours
B. 1720 hours
C. 420 hours
D. 1680 hours

AACSB: Analytical
Difficulty: Easy
A. Standard cost systems use budgeted costs of direct material and direct labour.
B. Variances provide a means of performance evaluation and rewards for employees.
C. A standard costing system is usually more expensive than an actual costing system.
D. Variances provide motivation for employees to adhere to standards.
AACSB: Reflective
Difficulty: Easy
A. Unfavourable variances represent the costs of producing inefficiently.
B. Unfavourable variances (after closing to cost of goods sold) cause cost of goods sold to be higher.
C. Unfavourable variances are recorded as a credit entry.
D. Significant unfavourable variances should be investigated by managers.
AACSB: Reflective
Difficulty: Medium
58. Which of the following statements is/are false?
A. All favourable variances represent the costs of producing efficiently.
B. Favourable variances (after closing to cost of goods sold) cause cost of goods sold to be lower.
C. Significant favourable variances do not need to be investigated by managers.
D. All favourable variances represent the costs of producing efficiently AND significant favourable variances do not need
to be investigated by managers.
AACSB: Reflective
Difficulty: Medium
59. Which of the following statements is true with regard to variances requiring investigation?
i. Favourable variances do not need to be investigated.
ii. Large variances should be investigated.
iii. Consistent trends in variances should be investigated.
A. i
B. ii
C. i and ii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
60. A firm's purchasing manager bought poor quality material at a large saving. Because of the lower quality of material,
more scrap was produced and because of the extra labour hours required an additional employee had to be hired to
assist in the cutting operation. Assuming only the facts given, what variance(s) would result?
A. Favourable material price
B. Favourable material price; unfavourable material quantity; unfavourable labour efficiency
C. Favourable material price; unfavourable material quantity; unfavourable labour efficiency; unfavourable labour rate
D. Favourable material price; unfavourable labour efficiency
AACSB: Reflective
Difficulty: Medium
61. For a particular period a firm worked a larger number of overtime hours than planned in order to complete a larger
than usual number of job orders. The jobs were all completed within the standard time allowed for each job. Assuming
only the facts given, what variance(s) would result from these facts?
A. Unfavourable labour rate; unfavourable labour efficiency
B. Unfavourable labour efficiency; unfavourable material quantity variance
C. Unfavourable labour rate; unfavourable labour efficiency; unfavourable material quantity
AACSB: Reflective
Difficulty: Medium
62. Which of the following statements is a definition of standard quantity of direct materials allowed for a period? Standard
quantity of direct materials is
A. the number of units of material that should have been used for expected (budgeted) production.
B. the number of units of material that were used for actual production.
C. the number of units of material that should have been used for actual production.
D. the number of units of material required for each unit of production.
AACSB: Reflective
Difficulty: Easy
63.
A particular firm with zero material inventory purchased 30 000 kg of material and used 25 000 kg. For control purposes, it is
recommended that firms calculate the material price variance at the time of purchase. The variance could alternatively be calculated at
the time of usage of that material. Which of the following statements most correctly reflects a comparison of the two methods for this
firm?

A. Whether calculated on purchase or usage, both variances will be favourable.
B. Whether calculated on purchase or usage, both variances will be unfavourable.
C. The variance calculated on purchase will be larger than the variance calculated on usage, but in the same direction
D. The variance calculated on purchase will be smaller than the variance calculated on usage, but in the same direction

AACSB: Reflective
Difficulty: Medium
64. In which of the following circumstances would it be acceptable to record the material price variance at the time of
usage of the materials?
A. Where a fixed contract price is in place for the purchase of materials for a period.
B. Where the purchasing manager is held accountable for all material price variances.
C. Where the purchasing manager has little control over the price paid.
D. Both where a fixed contract price is in place for the purchase of materials for a period AND where the purchasing
manager has little control over the price paid.
AACSB: Reflective
Difficulty: Hard
65. Which of the following statements regarding allowances for spoilage and/or inefficiency is not correct?
A. When allowances are not included within the standards, any inefficiencies are highlighted as unfavourable variances.
B. When allowances are not included within the standards, any inefficiencies are highlighted as favourable variances.
C. Firms would never set standards that included an allowance for spoilage.
D. When allowances are not included within the standards, any inefficiencies are highlighted as favourable variances AND
firms would never set standards that included an allowance for spoilage.
AACSB: Reflective
Difficulty: Easy
66. A department's budgeted output for a 4-week period was 500 units at a standard cost of $100 per unit. The actual
production was 450 units and the firm's ledger revealed actual costs for the month to be $50 200. The standard production
cost for the period is
A. $50 000.
B. $50 200.
C. $45 000.
D. insufficient information to determine.
AACSB: Reflective
Difficulty: Easy
67. When material price variances are recognised at the time of material purchase, direct materials used are
A. credited to the materials account at standard cost.
B. debited to the work in process account at actual prices.
C. credited to the materials account at actual cost.
D. debited to the materials account at standard cost.
AACSB: Reflective
Difficulty: Easy
68. A material price variance of $5000 (unfavourable) for a period has been calculated. The actual unit price was $9.00.
The actual quantity of material used was 6000. The standard quantity of materials was 5000. Calculate the standard unit
price for a unit of raw materials for the period (round where necessary).
A. $5.00
B. $8.00
C. $8.17
D. $9.83
AACSB: Analytical
Difficulty: Easy
69. Which of the following could not be an explanation of the labour efficiency variance for a firm whose variances for the
period included an unfavourable material price variance and a favourable labour efficiency variance?
A. Standards are out of date.
B. If the unfavourable material price variance was due to better quality materials being purchased, this in turn could lead
to less waste of materials.
C. A timesaving improvement to the material-handling techniques has not yet been incorporated into the standard.
D. Deliberate inefficiency.
AACSB: Reflective
Difficulty: Medium
70.

What amount would be debited to materials account for the purchase of material?

A. $780
B. $750
C. $720
D. $810

AACSB: Analytical
Difficulty: Easy
71.

What amount would be debited to work in process account for materials used?

A. $660
B. $630
C. $600

AACSB: Analytical
Difficulty: Easy
72. When using the statistical control chart to investigate variances
A. managers should only investigate variances that are beyond the critical value.
B. managers should only investigate variances that are fall below the critical value over a number of consecutive periods.
C. any variances that go beyond the critical values are likely to be the result of random events such as employee illness.
D. managers should estimate the critical values by averaging the variances over a number of periods.
AACSB: Reflective
Difficulty: Medium
values for this process are $1000. Which of the following statements is correct?
A. Jasmine should investigate only unfavourable variances that are larger than $1000.
B. Any variances of less than $1000 are likely to be the result of random events.
C. Jasmine should investigate unfavourable variances of any size, and favourable variances that are larger than $1000.
D. Jasmine should investigate any variances that are larger than $500.
AACSB: Reflective
Difficulty: Medium
values for this process are $1000. The labour efficiency variances for the last 6 months were all favourable: $500F (July),
$600F (August), $750F (September), $880F (October), $900F (November) and $990F (December). Jasmine decides not
to investigate these variances. Do you agree with her decision?
A. Yes, because all the variances are below the critical value.
B. Yes, because all the variances are below the critical value and are favourable.
C. No, because there is a trend of the variances increasing steadily over time.
D. No, she should investigate the variances in November and December because they are both within 10% of the critical
value.
AACSB: Reflective
Difficulty: Medium
peak condition. However, Product X is quite complex and even a skilled worker operating in high efficiency often needs
another 5 minutes to adjust the tools, re-oil the machine and rework some aspects of the product. A skilled worker is paid
Jay decides to develop a perfection standard. The standard labour cost for one unit of Product X is
A. $15.
B. $17.50.
C. $18.
D. $21.
AACSB: Analytical
Difficulty: Medium
peak condition. However, Product X is quite complex, and even a skilled worker operating in high efficiency often needs
another 5 minutes to adjust the tools, re-oil the machine, and rework some aspects of the product. A skilled worker is paid
Jay decides to develop a practical standard. The standard labour cost for one unit of Product X is
A. $15.
B. $17.50.
C. $18.
D. $21.
AACSB: Analytical
Difficulty: Medium
77. When developing a perfection standard for direct labour, a manager should include which of the following?
i Labour on-costs
ii Occasional inefficiencies and machine breakdowns
iii A minimal acceptable idle time
A. i
B. i and ii
C. iii
D. i and iii
AACSB: Reflective
Difficulty: Easy
The labour efficiency variance for July was
A. $1200 Favourable.
B. $1200 Unfavourable.
C. $1000 Favourable.
D. $1000 Unfavourable.
AACSB: Analytical
Difficulty: Easy
Which of the following is a likely explanation for the July labour efficiency variance?
A. The standard was set incorrectly.
B. A machine breakdown has resulted in unanticipated inefficiencies.
C. The production level was smaller than expected.
D. Both incorrectly set standards and a machine breakdown are likely explanations.
AACSB: Reflective
Difficulty: Medium
80. Dexter Surgical Tools has set the following perfection direct labour standard: 0.5 hours at $20 per hour, for each unit
of Tool #11. The company plans to produce 1200 units of Tool #11 in July; however, the actual production was 1000 units
and only 900 units were actually sold. The actual labour cost for July was $22 per hour.
If Dexter Surgical Tools decides to use a practical standard instead of the perfection standard, the labour efficiency
variance is likely to
A. remain unchanged.
B. increase.
C. decrease.
D. not enough information.
AACSB: Reflective
Difficulty: Medium
81. Companies sometimes develop standards based on historical data. Which of the following statements about this
approach is correct?
A. This is an appropriate approach for mature production process.
B. This is an appropriate approach for processes that are labour intensive.
C. This is an inappropriate approach because it is a relatively more expensive approach to standard setting.
D. This approach is only acceptable for manufacturing companies.
AACSB: Reflective
Difficulty: Easy
82. Which of the following is not a desired outcome from allowing managers to participate in the setting of standards?
A. Greater confidence in the accuracy of the standard
B. Increased commitment to standards
C. Easily attained standards
AACSB: Reflective
Difficulty: Medium
Learning Objective: 10.09 Describe how the use of standard costing and variance reporting may impact individuals' behaviours
83. When a manager receives a bonus based on meeting the standards and achieving increased efficiencies which of the
following could be an undesired outcome?
A. Increased profit
B. Satisfied customers
C. Reduced employee theft
D. Lower quality raw materials
AACSB: Reflective
Difficulty: Medium
84. Standard costs can be used for
A. controlling costs and products.
B. controlling budgets and products.
C. control and products.
D. control and product costing.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 10.10 Explain how standard costs are used in product costing
85. In a standard costing system all inventories are recorded at
A. actual cost.
B. standard cost.
C. budgeted cost.
D. purchase cost.
AACSB: Reflective
Difficulty: Easy
86. As production takes place, the product costs are added to the
A. raw materials inventory account.
B. work in process inventory account.
C. finished goods inventory account.
D. cost of goods sold account.
AACSB: Reflective
Difficulty: Medium
87. An debit balance in the direct material price variance account or direct labour price variance accounts would cause the
costs of goods sold to
A. increase.
B. decrease.
C. stay the same.
D. have no impact.
AACSB: Reflective
Difficulty: Medium
88.
Usefulness of standard costs in controlling costs

Standard costs are said to be useful in controlling costs. Assume that the standard cost for raw materials per unit of finished product is
$6.00 based on 3 kg at $2.00 per kg.
i. Explain how such a standard can be used to evaluate performance.
ii. Why is the degree of controllability important in utilising standard costs to evaluate performance?
i. The standard cost provides a measure of how much material should be used for a unit of product and how much each
kilogram of raw material should cost. This standard provides a basis for evaluating performance by allowing a benchmark
to be established based on the actual output of finished product for the time period. If an output of 100 units is assumed,
then 300 kilograms should have been used. Furthermore, these materials should have been purchased for $2 per kilo.
ii. The degree of controllability is important because not all factors are subject to the same degree of control. For example,
the market for the raw material may be extremely competitive, in which case both buyers and sellers in that market are
price takers. Therefore, management would have very little control over the material's price variance. On the other hand,
management generally has more control over the usage of materials due to the ability to influence the amount of scrap,
rejected units etc. that are produced.
AACSB: Reflective, Communication

Difficulty: Medium
89.
Motivational effects of standard cost systems

Standard cost systems can have motivational effects; some are desirable, some are not. Consider the following situation:
The materials purchasing manager is paid a salary plus a bonus based on the net favourable materials price variance. Generally, this
bonus amounts to 30 to 40 per cent of the manager's total compensation. Due to the bankruptcy of a company in a related field, there is
an opportunity to buy a key raw material. The standards for this material call for grade AA, usually purchased for $56 per tonne.
Because of the bankruptcy, the company can obtain grade AAAA for $62 per tonne. While the quality of the final product will be the
same regardless of the grade of raw material used, there will be substantial savings in production if the grade AAAA material is used.
These savings are expected to be two to three times the additional cost of $6 per tonne.
i. How would an unfavourable price variance on a particular purchase affect the overall price variance for the year?
ii. Will the use of the materials price variance to provide a bonus to the purchasing manager lead to a desirable or undesirable
behavioural outcome? Explain.
i. The effect of an unfavourable price variance is to reduce the net favourable variance. A sufficient number of such events
could cause the net materials price variance to be unfavourable and would eliminate the bonus to the materials
purchasing manager.
ii. The use of the variance in this way would lead to an undesirable behavioural outcome. The materials purchasing
manager is a gatekeeper; that is, this manager observes the purchasing opportunities available and determines whether
the firm will follow them. In this case, the manager would be unlikely to pursue the opportunity since it would have a
negative effect on the bonus calculation. As a result, the overall possibility of offsetting higher purchase costs with savings
in production would not be explored by management.

Difficulty: Hard
90.
Interaction of materials and labour variances

For the quarter just ended, BoSan Pty Ltd reported the following variances in one of its manufacturing departments:

The sum of the favourable variances above exceeded the unfavourable materials price variance by a considerable amount. The quality
of the output from the department was the same as usual. Practically all of the raw material used in this quarter was purchased in this
quarter.
Is there any connection between these variances? If so, explain.
While a connection between these variances cannot be guaranteed, the following certainly is plausible. Higher than
standard quality materials were purchased leading to an unfavourable materials price variance. When these materials
were utilised, however, favourable efficiency variances were created because the higher quality raw material was easier
for labour and machines to process, reducing wasted material and wasted labour and machine time.

Difficulty: Hard
91.
Cost flow: standard system versus normal system

How does the flow of costs in a standard cost system differ from the flow in a normal cost system?
In a standard cost system, the entries into the work in process inventory account are based on standard quantities and
standard costs. In an actual cost system, the entries would be based on actual quantities and actual costs. The same
comment applies to the finished goods inventory account.
The raw materials inventory accounting standard cost system reflects actual quantities purchased valued at standard
costs. In an actual cost system, actual purchase costs would be entered into the account.

Difficulty: Medium
92. Explain how practical standards the attitude of managers and their willingness to commit to the set standards.
Standards that are challenging but are expected to be attained are called practical (or attainable) standards. These
standards assume a production process that is as efficient as it is practical, under normal operating conditions. Practical
standards factor in occurrences such as occasional machine breakdowns and normal amounts of raw material wastage.
Attaining a practical standard keeps employees on their toes, without demanding miracles. Many organisational
psychologists believe that practical standards result in greater motivation to achieve standards, and encourage more
positive and productive employee attitudes, than do perfection standards.
AACSB: Communication
Difficulty: Medium
93. In general, it is felt that theoretical standards do not motivate employees to achieve goals, as employees are aware
that the standards set are virtually impossible to achieve.
TRUE
AACSB: Reflective
Difficulty: Easy
94. It is possible to set standards by benchmarking against better performing companies in
the industry.
TRUE
AACSB: Reflective
Difficulty: Easy
95. When investigating variances, management are more likely to investigate those costs that are uncontrollable.
FALSE
AACSB: Reflective
Difficulty: Easy
96. Variance analysis is used to evaluate actual performance by analysing the differences between standard and actual
costs.
TRUE
AACSB: Reflective
Difficulty: Easy
97. Five kilograms at a cost of $7 per kilogram and 2 hours @ $32 per hour are examples of standard costs for the
production of a product.
TRUE
AACSB: Reflective
Difficulty: Easy
98. Standard costs are used for evaluating performance and controlling costs but they are never used for costing
products.
FALSE
AACSB: Reflective
Difficulty: Easy
99. Variances are used for control purposes by highlighting problem areas, such as using too many materials, so that
corrective action can be taken.
TRUE
AACSB: Reflective
Difficulty: Easy
100. When using a standard costing system for recoding purposes, most companies will close the variance accounts by
debiting finished goods.
FALSE
AACSB: Reflective
Difficulty: Easy
101. Production managers are usually in the best position to influence labour rates, labour usage and material prices.
FALSE
AACSB: Reflective
Difficulty: Easy
102. In setting standards, it is common to carry out time and motion studies to determine how long it should take workers
to perform a particular process.
TRUE
AACSB: Reflective
Difficulty: Easy
103. When estimating the cost of an economic quantity of a raw materials, any discounts for the bulk order are included in
the estimated price.
TRUE
AACSB: Reflective
Difficulty: Easy
104. When a variance is identified as insignificant, managers need to find out the cause of the variance.
FALSE
AACSB: Reflective
Difficulty: Easy
105. Product costs can be used in both financial and management accounting.
TRUE
AACSB: Reflective
Difficulty: Easy
Chapter 10 Testbank Summary
Category # of Questi
ons
AACSB: Analytical 29
AACSB: Communication 1
AACSB: Reflective 71
AACSB: Reflective, Communication 4
Difficulty: Easy 68
Difficulty: Hard 4
Difficulty: Medium 33
Learning Objective: 10.01 Explain how standard costing can be used to help control costs and manage resources mor 7
e effectively
Learning Objective: 10.02 Describe the analysis of historical data and engineering methods of setting standards 6
Learning Objective: 10.03 Explain how the use of perfection standards and practical standards may impact behaviour 11
Learning Objective: 10.04 Develop standard costs for direct material and direct labour 5
Learning Objective: 10.05 Calculate and interpret the direct material price and quantity variances, and the direct labour 33
rate and efficiency variances
Learning Objective: 10.06 Explain several methods that can be used for assessing the significance of standard cost va 7
riances
Learning Objective: 10.07 Understand how to determine the causes of variances, and when to take corrective actions 10
Learning Objective: 10.08 Understand how control can be achieved through assigning responsibility for certain varianc 7
es to particular managers
Learning Objective: 10.09 Describe how the use of standard costing and variance reporting may impact individuals' be 3
haviours
Learning Objective: 10.10 Explain how standard costs are used in product costing 4
Learning Objective: 10.11 Prepare journal entries to account for direct material and direct labour cost variances 16

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Chapter 10 Testbank

D. (PQ – SQ) (AP – SP).

(AQ – SQ) (AP – SP).

(AH – SH) (AR – SR),

Usefulness of standard costs in controlling costs

Motivational effects of standard cost systems

Interaction of materials and labour variances

Cost flow: standard system versus normal system

D. (PQ – SQ) (AP – SP).

(AQ – SQ) (AP – SP).

(AH – SH) (AR – SR),

Usefulness of standard costs in controlling costs

AACSB: Reflective, Communication

Motivational effects of standard cost systems

AACSB: Reflective, Communication

Interaction of materials and labour variances

AACSB: Reflective, Communication

Cost flow: standard system versus normal system

AACSB: Reflective, Communication

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