Question

• What are the basic objectives in the use of standard costs?
• What is meant by reporting by the “principle of exceptions,” as the term is used in reference to cost control?
• What are the two variances between the actual cost and the standard cost for direct materials?
• The materials cost variance report for Nickols Inc. indicates a large favorable materials price variance and a significant unfavorable materials quantity variance. What might have caused these offsetting variances?
• What are the two variances between the actual cost and the standard cost for direct labor?
• Who generally has control over the direct labor cost variances?

Answer 1

1. Standard costs assist management in controlling costs and in motivating employees to focus on costs.

2. Reporting by the “principle of exceptions” is the reporting of only variances (or “exceptions”) between standard and actual costs to the individual responsible for cost control.

3.

The two variances in direct materials cost are:

a.                   Direct materials price - the direct material price variance is basically the difference between the original prices paid to obtain the materials on its budgeted price multiplied by actual number of units acquired. This can be illustrated by the following formula:

(Actual price - Budgeted Price) x Actual Quantity = Direct MPV.

b.                  Direct materials quantity - It is the difference between actual amount of material used in the production process and the amount that was expected to be used. It can calculated by the following formula:

DM Quantity Variance = (SQ − AQ) × SP

Where,

            SQ is the standard quantity allowed

            AQ is the actual quantity of direct material used

            SP is the standard price per unit of direct material.

4. The offsetting variances might have been caused by the purchase of low-priced, inferior materials. The low price of the materials would generate a favorable materials price variance, while the inferior quality of the materials would cause abnormal spoilage and waste, thus generating an unfavorable materials quantity variance.

5.

(a)

            The two variances in direct labor costs are:

(1)        Rate

(2)        Time

(b)

The direct labor cost variance is usually under the control of the production supervisor.