Chapter 18
Standard Costing: Incorporating Standards into the Accounting Record
Discussion Questions
1) When standard costs are not incorporated, they
may be used for the purposes of pricing, budgeting,
and controlling cost; but if they are not used for
inventory costing, the advantages from the saving of
clerical effort in accounting cannot be obtained.
2) With actual cost methods, it is first necessary to
select a cost flow method lifo, fifo, average, etc. It is
then necessary to keep detailed records of quantities
and prices and to make fairly complex calculations of
inventory costs. With a standard costing system, only
quantities, not prices, must be taken into account,
facilitating both record keeping and calculations.
Standard costs also provide cost control.
3) The number of variance accounts is determined by
(a) the number and type of variances that are to
appear in statements for management use, and (b) the
need for easy disposal of variances at the end of the
fiscal period, particularly when the variances are not
treated uniformly in financial statements and for
analyses.
4) (a) The standard cost of products completed and
products sold can be determined immediately without
waiting for the actual cost to be calculated. With
standard costs, monthly statements can be prepared
more quickly. (b) A firm producing a great many
different products finds it practically impossible to
determine the actual cost of each product. The use of
standard costs will facilitate the preparation of
income statements by product lines. (c) Keeping
finished goods stock records in quantities only will
result in clerical saving, since this eliminates the
necessity for recording the actual unit cost of each
receipt and issue or shipment.
5) The standard costing of inventories depends on (a)
the types of standards employed, (b) the degree of
success that the company has in keeping overall
actual costs in line with standard costs, and (c) the
concept held with regard to the most suitable kind of
cost.
6) (a) Deferral of variances is supported on the
grounds that, if the standards in use are based on
normal price, efficiency, and output levels, positive
and negative variances can be expected to offset one
another in the long run. Because variance account
balances at any given point in time are due to
recurring seasonal and business cycle fluctuations,
and because periodic reporting requirements result in
arbitrary cutoff dates, variance account balances at a
particular cutoff date are not assignable to operating
results of the period then ended. They will cancel out
over time and therefore should be carried to the
balance sheet. (b) Variances appearing as charges or
credits on the income statement are regarded as
appropriate charges or credits in the period in which
they arise. They are considered the result of favorable
or unfavorable departures from normal (standard)
conditions and are disclosed separately from cost of
goods sold at standard. This provides management
with unobscured information for immediate
corrective action. Inventory costs and cost of goods
sold should not be distorted by variances that
represent abnormal efficiencies or inefficiencies. The
standard cost represents that amount which is
reasonably necessary to produce finished products
and should therefore be considered the best measure
of the cost of goods manufactured and inventory cost,
as long as the underlying operating conditions remain
unchanged .(c) The argument for allocating variances
between inventories and cost of goods sold is that
standard costs are a useful tool for purposes of
managerial control, but should not be substitutes for
actual historical costs in the financial statements.
Only actual historical costs should be used for
financial reporting, even though they are greater or
less than standard costs, and without regard to the
reasons for their differences from standard costs.
Standard cost variances are not gains or losses but
costs (or reductions therein) of goods manufactured
and should be allocated between inventories and cost
of goods sold. To treat them as gains or losses in the
period in which they arise distorts both the inventory
and gross profit figures. This distortion will be even
greater if the standards are lacking in accuracy or
reliability. Further, to substitute standard costs for
actual historical costs in the financial statements
represents an unwarranted sacrifice of objectivity.