4th Edition Topic Focus: Standard Costing Systems Test Bank

T4 – Topic Focus Standard Costing Systems

TRUE-FALSE STATEMENTS

1. Using a normal costing system, direct materials and direct labor are recorded at standard cost, and overhead is applied to products using a predetermined overhead rate.
2. Using a normal costing system, direct materials and direct labor are recorded at actual cost, and overhead is applied to products using a predetermined overhead rate.
3. When using a normal costing system, only over- or under-applied overhead costs are adjusted to the actual overhead cost at the end of the period.
4. When using a standard costing system, all product costs are recorded at standard cost as products are being made.
5. When using a standard costing system, direct material and direct labor are recorded at actual cost, while manufacturing overhead is applied at a standard rate.
6. When using a standard costing system, at the end of the accounting period, the balances in all inventory and cost of goods sold accounts will reflect standard amounts.
7. When using a standard costing system, when materials are purchased, the transaction is recorded in the inventory account at the standard price and accounts payable is charged for the full amount owed to the supplier.
8. When using a standard costing system, the direct materials price variance is recorded at the time direct materials are transferred to the production floor.
9. When using a standard costing system, the direct materials price variance is recorded at the time direct materials are purchased.
10. When using a standard costing system, the direct materials quantity variance is recorded at the time direct materials are transferred to the production floor.
11. The standard cost of labor consists of two components: standard quantity of direct labor hours allowed for actual production, and standard direct labor rate per hour.
12. When using a standard costing system, recording events related to variable overhead requires four separate entries.
13. Manufacturing overhead is a temporary account that must have a zero balance at the end of the accounting period.
14. The easiest approach to close variance accounts is to close directly to the Raw Materials Inventory account.
15. An advantage of standard costing is that it gives visibility to the variances that arise in the production process.

MULTIPLE-CHOICE QUESTIONS

1. When using a normal costing system, direct materials and direct labor are recorded at
   1. standard cost and overhead is applied to products using a predetermined overhead rate.
   2. actual cost and overhead is treated as a period cost.
   3. actual cost and overhead is applied to products using a predetermined overhead rate.
   4. standard cost and overhead is treated as a period cost.
2. A costing system where direct material and direct labor are recorded at actual cost, and overhead is applied to products using a predetermined overhead rate is referred to as
   1. normal costing.
   2. variable costing.
   3. full costing.
   4. standard costing.
3. A costing system where all product costs are recorded at standard cost and are assigned as the products are being made is referred to as
   1. normal costing.
   2. variable costing.
   3. full costing.
   4. standard costing.
4. When using a standard costing system, which of the following statements is true?
   1. There is never any question about the recorded cost of a unit in inventory; it is always at the standard cost.
   2. There is always a question about the recorded cost of a unit in inventory; the standard cost differs with each purchase.
   3. The recorded cost of a unit recorded in inventory last week will differ from the recorded cost of a unit recorded in inventory today.
   4. The recorded cost of a unit in inventory differs in the amount of direct materials and direct labor, but not for overhead, regardless if the unit cost is recorded today or next week.
5. When using a standard costing system, at the end of an accounting period, the balances in which of the following accounts will be at standard amounts?
   1. Raw Materials Inventory and Work in Process Inventory only
   2. Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold
   3. Finished Goods Inventory and Cost of Goods Sold only
   4. Raw Materials, Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold
6. When using a standard costing system, at what amount will the inventory and cost of goods sold amounts be reported on the financial statements?
   1. Inventory at standard and Cost of Goods Sold at actual
   2. Inventory at actual and Cost of Goods Sold at actual
   3. Inventory at standard and Cost of Goods Sold at standard
   4. Inventory at actual and Cost of Goods Sold at standard
7. When using a standard costing system, which of the following should be recorded when recording the purchase of direct materials?
   1. Debit Raw Materials Inventory at the standard price and credit Accounts Payable at the standard price.
   2. Debit Raw Materials Inventory at the standard price and credit Accounts Payable at the actual price with a debit or credit to Direct Materials Price Variance.
   3. Credit Raw Materials Inventory at the standard price and debit Accounts Payable at the actual price with a debit or credit to Direct Materials Price Variance.
   4. Credit Raw Materials Inventory at the standard price and debit Accounts Payable at the standard price.
8. Haven Industries purchased 1,000 units of product at a cost of $1.20 per unit. Haven’s standard price per unit was set at $1.10. Which of the following is the correct journal entry to record the purchase?

1. When using a standard costing system, which of the following should be recorded when direct materials are transferred to the production floor?
   1. Debit Raw Materials Inventory for the actual amount at the standard price and credit Work in Process Inventory for the actual amount at the standard price.
   2. Debit Raw Materials Inventory for the standard amount at the standard price, and credit Work in Process Inventory for the actual amount at the actual price, with a debit or credit to Direct Material Quantity Variance.
   3. Credit Raw Materials Inventory for the standard amount at the standard price and debit Work in Process Inventory for the standard amount at the actual price with a debit or credit to Direct Material Quantity Variance.
   4. Credit Raw Materials Inventory for the actual amount at the standard price and debit Work in Process Inventory for the standard amount at the standard price with a debit or credit to Direct Material Quantity Variance.
2. Haven Industries transferred 5,500 units of raw material into production to produce 2,500 units. The standard quantity of raw material required for each unit is 2 and the standard cost is $1.20 per unit. Which of the following is the correct journal entry to record the transfer?

Direct Material Quantity Variance: $6,600 ̶ $6,000 = $600 debit

1. When using a standard costing system, which of the following is recorded for the liability accrual and the impact on Work in Process Inventory as a product is being made?
   1. Debit Wages Payable for the actual hours of labor at the standard rate, and credit Work in Process Inventory for the actual hours worked at the standard rate.
   2. Debit Wages Payable for the standard hours at the standard rate, and credit Work in Process Inventory for the actual hours at the actual rate.
   3. Credit Wages Payable for the standard hours at the standard rate, and debit Work in Process Inventory for the standard hours at the actual rate.
   4. Credit Wages Payable for the actual hours at the actual rate, and debit Work in Process Inventory for the standard hours at the standard rate.
2. The following information is available for Haven Industries:

Actual production 14,000 units

Budgeted production 14,400 units

Direct labor:

Standard 4 hours per unit at $10 per hour

Actual 54,720 hours at $9.80 per hour

Which of the following is the correct journal entry to record the direct labor payroll?

Direct Labor Efficiency Variance: [(14,000 × 4) – 54,720] × $10 = $12,800 credit;

Direct Labor Rate Variance: $560,000 ̶ $12,800 ̶ $536,256 = $10,944 credit

1. When using a standard costing system, which of the following should be recorded when variable overhead is applied during the period?
   1. Debit Manufacturing Overhead for the actual overhead costs, and credit Work in Process Inventory using a predetermined variable overhead rate.
   2. Debit Work in Process Inventory for the actual overhead costs, and credit Manufacturing Overhead using a predetermined variable overhead rate.
   3. Credit Manufacturing Overhead using the standard quantity of the application base, and debit Work in Process Inventory using a predetermined variable overhead rate.
   4. Credit Manufacturing Overhead using the actual quantity of the application base, and debit Work in Process Inventory using a predetermined variable overhead rate.
2. When using a standard costing system, which of the following should be recorded when invoices are received for variable overhead costs incurred?
   1. Debit Manufacturing Overhead for the actual overhead costs and credit Accounts Payable or Cash for the actual amount invoiced.
   2. Debit Work in Process Inventory for the actual overhead costs and credit Accounts Payable or Cash using a predetermined variable overhead rate.
   3. Credit Manufacturing Overhead for actual overhead rate and debit work in process inventory using a predetermined variable overhead rate.
   4. Credit Work in Process Inventory for the actual overhead and debit Accounts Payable or Cash using a predetermined variable overhead rate.
3. The following information relating to variable overhead is available for Haven Industries:

Spending variance $4,000 unfavorable

Efficiency variance $7,000 favorable

Which of the following is the correct journal entry to record the spending and efficiency variances?

1. When using a standard costing system, which of the following should be recorded to the Manufacturing Overhead and the Work in Process Inventory accounts when fixed overhead is applied during the period?
   1. Debit Manufacturing Overhead for the actual overhead costs and credit Work in Process Inventory using a predetermined fixed overhead rate.
   2. Debit Work in Process Inventory for the actual overhead costs and credit Manufacturing Overhead using a predetermined fixed overhead rate.
   3. Credit Work in Process Inventory for the actual overhead and debit Manufacturing Overhead using a predetermined fixed overhead rate.
   4. Credit Manufacturing Overhead and debit Work in Process Inventory for the standard quantity of the application base allowed using a predetermined fixed overhead rate.
2. The following information relating to fixed overhead is available for Haven Industries:

Spending variance $6,000 favorable

Volume variance $4,000 unfavorable

Which of the following is the correct journal entry to record the spending and efficiency variances?

1. When using a standard costing system, which of the following should be recorded to transfer units to Finished Goods Inventory?
   1. Debit Finished Goods Inventory for actual cost, and credit Work in Process Inventory for actual cost.
   2. Debit Finished Goods Inventory for standard cost, and credit Work in Process Inventory for standard cost.
   3. Debit Finished Goods Inventory for standard cost, and credit Work in Process Inventory for actual cost.
   4. Debit Finished Goods Inventory for actual cost, and credit Work in Process Inventory for standard cost.
2. When using a standard costing system, which of the following should be recorded when finished goods are sold?
   1. Debit Cost of Goods Sold for actual cost, and credit Finished Goods Inventory for actual cost
   2. Debit Cost of Goods Sold for standard cost, and credit Finished Goods Inventory for actual cost
   3. Debit Cost of Goods Sold for standard cost, and credit Finished Goods Inventory for standard cost
   4. Debit Cost of Goods Sold for actual cost, and credit Finished Goods Inventory for standard cost
3. The easiest way to dispose of variances at the end of the period is to
   1. carry the variances over to the following period.
   2. close the variances to Raw Materials Inventory.
   3. close the variances to Work in Process Inventory and Finished Goods Inventory accounts.
   4. close the variances to the Cost of Goods Sold account.

MATCHING

1. Match the following terms relating to a standard costing system to the appropriate statement by placing the letter to the left of each statement.

1. j – Variable overhead spending variance
2. g – Normal costing system
3. f – Fixed overhead volume variance
4. b – Direct labor rate variance
5. c – Direct material price variance
6. e – Fixed overhead spending variance
7. h – Standard costing system
8. i – Variable overhead efficiency variance
9. d – Direct material quantity variance
10. a – Direct labor efficiency variance

LO: 1, Bloom: K, Unit: TF04-2, Difficulty: Easy, Min: 5-6, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

BRIEF EXERCISES

1. Wolfe Manufacturing Company’s standards are set at one gallon of liquid for each unit of production at a cost of $2.10 per gallon. Actual production was 50,000 units using 45,000 gallons of liquid at a cost of $2.20 per gallon.

Required:

• 1. Calculate the direct material price variance.
  2. Calculate the direct material quantity variance.

1. ($2.10 ̶ $2.20) × 45,000 = $4,500 unfavorable
2. (50,000 – 45,000) × $2.10 = $10,500 favorable

LO: 1, Bloom: AP, Unit: TF04-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Wolfe Manufacturing Company has the following direct labor standards:

Standard labor hours for each unit of production 11 hours

Standard labor rate per hours $15.10

The following actual data has been provided by Wolfe:

Actual hours worked 8,000

Actual direct labor cost $120,000

Actual production 800 units

Required:

• 1. Calculate the direct labor rate variance.
  2. Calculate the direct labor efficiency variance.

1. $120,000 – (8,000 × $15.10) = $800 favorable
2. (8,000 × $15.10) – (800 × 11 × $15.10) = $12,080 favorable

LO: 1, Bloom: AP, Unit: TF04-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Wolfe Manufacturing Company has the following information related to variable overhead:

Standard hours per unit of production 3.5 hours

Standard variable rate $16 per hour

Actual hours during period 5,000 hours

Actual variable overhead cost $96,000

Actual production 1,400 units

Required:

• 1. Calculate the variable overhead spending variance for the period.
  2. Calculate the variable overhead efficiency variance for the period.

1. $96,000 – ($16 × 5,000) = $16,000 unfavorable
2. ($16 × 5,000) – ($16 × 3.5 × 1,400) = $1,600 unfavorable

LO: 1, Bloom: AP, Unit: TF04-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Wolfe Manufacturing has provided the following information related to fixed overhead.

Standard hours per unit of production 5 hours

Fixed overhead rate $12 per hour

Budgeted units of production 1,500 units

Actual fixed overhead cost $85,000

Actual units of production 1,440

Required:

• 1. Calculate the fixed overhead spending variance for the period.
  2. Calculate the fixed overhead volume variance for the period.

1. $85,000 – ($1,500 × 5 × $12) = $5,000 favorable
2. (1,500 × 5 × $12) – (1,440 × 5 × $12) = $3,600 unfavorable

LO: 1, Bloom: AP, Unit: TF04-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

EXERCISES

1. The following information has been gathered by the controller of Acme Industries.

Required:

Using standard costing, prepare the following journal entries.

• 1. Purchase of direct materials on account
  2. Transfer of direct materials into production
  3. Recording of payroll
  4. Payment for variable overhead
  5. Application of variable overhead to work in process
  6. Recording of variable overhead variances
  7. Application of fixed overhead to work in process
  8. Payment of fixed overhead
  9. Recording of fixed overhead variances

LO: 1, Bloom: AP, Unit: TF04-2, Difficulty: Moderate, Min: 15-18, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The following information has been gathered by the controller of Acme Industries.

Required:

Using standard costing, prepare the following journal entries.

• 1. Purchase of direct materials on account
  2. Transfer of direct materials into production
  3. Recording of payroll
  4. Payment for variable overhead
  5. Application of variable overhead to work in process
  6. Recording of variable overhead variances
  7. Application of fixed overhead to work in process
  8. Payment of fixed overhead
  9. Recording of fixed overhead variances

LO: 1, Bloom: AP, Unit: TF04-2, Difficulty: Moderate, Min: 15-18, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. What is the difference between a normal costing system and a standard costing system as it relates to the amounts at which costs are recorded, and how variances are accounted for?

When using a normal costing system, direct materials and direct labor are recorded at actual cost and overhead is applied to products using a predetermined overhead rate. Variances are calculated at the end of a period by comparing recorded costs to the standard costs that should have been incurred.

When using a standard costing system, all product costs are recorded at standard cost as the products are being made. At the end of the period, the balances in all inventory and cost of goods sold accounts reflect standard amounts. Standard costing gives visibility to the variances. Companies make adjustments to the recorded balances through a series of journal entries using the variances.

LO: 1, Bloom: C, Unit: TF04-1, Difficulty: Easy, Min: 4-5, AACSB: Analytic, Communication, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

1. Suggest one reason for each of the following variances.
   1. Unfavorable direct material quantity variance
   2. Favorable direct labor rate variance
   3. Favorable variable overhead spending variance
   4. Unfavorable fixed overhead volume variance
2. An unfavorable direct material quantity variance might be caused because not enough material was budgeted for the units of product produced, unskilled workers required the use of too much material, machine breakdowns damaged the material, or apathetic workers wasted material.
3. A favorable direct labor rate variance might occur because the budget used a higher wage rate than reasonable, lower paid workers than expected were assigned to production, budgeted overtime was not required, or some payroll benefits included in the budgeted rate were cut due to a downturn in the economy.
4. A favorable variable overhead spending variance may be caused because the actual cost of variable overhead items is less than budgeted. Examples might be indirect labor or indirect material costing is less than expected.
5. The only reason for an unfavorable fixed overhead volume variance is caused relates to the production level. If fewer units are produced than budgeted, the variance is unfavorable.

LO: 1, 2, Bloom: AN, Unit: TF04-2, TF04-4, Difficulty: Moderate, Min: 8-10, AACSB: Analytic, Communication, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

ESSAY

1. When using a standard costing system, the balances in all inventory and cost of goods sold accounts will be at standard amounts at the end of the accounting period. Variances for direct materials, direct labor, and manufacturing overhead have been recorded throughout the period.

Required:

For each of the following variances, identify how it is calculated, at what point the variance is recorded, and the interpretation of an unfavorable variance.

• • • 1. Direct material price variance
      2. Direct material quantity variance
      3. Direct labor rate variance
      4. Direct labor efficiency variance
      5. Variable overhead spending variance
      6. Variable overhead efficiency variance
      7. Fixed overhead spending variance
      8. Fixed overhead volume variance

1. The direct material price variance is calculated as the difference between the full amount owed to the supplier and the standard price. It is recorded at the point of purchase. An unfavorable variance indicates that the price paid for the material was more than the standard price set.
2. The direct material quantity variance is the difference between the quantity of direct material used and the quantity that should have been used according to the standards set times the standard price. The variance is recorded when the material is transferred to the production floor. An unfavorable variance indicates that too much material is being used in the production of the product.
3. The direct labor rate variance is calculated as the difference between the actual rate and the standard rate of pay multiplied by the actual hours worked. The variance is recorded at the time the payroll is recorded. An unfavorable variance indicates that the company is paying more per hour for direct labor than the amount set as the standard.
4. The direct labor efficiency variance is calculated as the difference between the actual hours worked and the standard hours allowed for production, times the standard rate of pay. It is recorded at the time the payroll is recorded. An unfavorable variance indicates that the number of direct labor hours used to produce the product was more than that allowed by the standards.
5. The variable overhead spending variance is the difference between the amount spent for variable overhead and the amount of budgeted variable overhead (static budget). The variance is recorded at the end of the period. An unfavorable variance indicates that the company paid more for variable overhead than set by standards.
6. The variable overhead efficiency variance is the difference between flexible budget and variable overhead applied. The variance is recorded at the end of the period. It indicates how efficiently the company used its resources. An unfavorable variance indicates that standards set for drivers such as direct labor or machine hours were too low or usage was too high.
7. The fixed overhead spending variance is the difference between the amount spent for fixed overhead and the amount of budgeted fixed overhead. The variance is recorded at the end of the period. An unfavorable variance indicates that the company paid more for fixed overhead than set by standards.
8. The fixed overhead volume variance is the difference between budgeted fixed overhead cost and applied fixed overhead costs. The variance is recorded at the end of the period. An unfavorable variance indicates that the company was not fully utilizing capacity (actual production was less than expected).

LO: 1,2, Bloom: AN, Unit: TF04-2, TF04-4, Difficulty: Moderate, Min: 15-20, AACSB: Analytic, Communication, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

• 1. What is the difference between a normal costing system and a standard costing system?
  2. What adjustments are required at the end of each period for each?
  3. What is an advantage of standard costing?
  4. Are inventory and cost of goods sold accounts reported on financial statements at actual cost or standard cost?

1. When using a normal costing system, direct materials and direct labor are recorded at actual cost and overhead is applied to products using a predetermined overhead rate. When using a standard costing system, all product costs are recorded at standard cost as the products are being made.
2. When using a normal costing system, only over- or under-applied overhead cost needs to be adjusted to the actual overhead cost at the end of the period. When using a standard costing system, the balances in all inventory and costs of goods sold accounts will be at standard amounts at the end of an accounting period. Companies make adjustments to the recorded balances through a series of journal entries to change amounts reported on financial statements from standard cost to actual cost.
3. The advantage of standard costing is that it gives visibility to the variances that arise in the production process. Because variances must be recorded and closed to Cost of Goods Sold, the impact of not achieving standards becomes unavoidably clear to managers.
4. Inventory and cost of goods sold accounts must be reported on financial statements at actual cost rather than standard cost.

LO: 1, Bloom: AN, Unit: TF04-1, TF04-2, Difficulty: Moderate, Min: 8-10, AACSB: Analytic, Communication, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting