Sole Purpose Shoe Company is owned and operated by Sarah Charles. The company manufactures casual shoes, with manufacturing facilities in your state. Sarah began the business this year, and while she has a great deal of experience in manufacturing popular and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help. Sarah’s first questions for you have to do with the general ideas and terminology used to evaluate variances. Provide answers to the following questions (1)-(3). 1. Why might Sarah want to use standard costs to compare with her actual costs? A) Management can evaluate the differences between standard costs and actual costs to focus on correcting the cost variances. B) Standard costs give management a cost structure for products that is applicable for the entire life of the business. C) Standard costs allow management to motivate employees by comparing their performance to what it would be under perfect conditions. 2. What are some possible drawbacks to using standard costs that Sarah might consider? Check all that apply. A) Since standards are impossible to attain, they are a distraction from the work at hand. B) Since standards never change, they do not reflect reality. C) Standards limit operating improvements because employees may be discouraged from improving beyond the standards. D) Employees may focus only on efficiency improvement and their own operations rather than considering the larger objectives of the organization. E) Standards may become “stale” in a dynamic manufacturing environment.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Sole Purpose Shoe Company is owned and operated by Sarah Charles. The company manufactures casual shoes, with manufacturing facilities in your state. Sarah began the business this year, and while she has a great deal of experience in manufacturing popular and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help.

Sarah’s first questions for you have to do with the general ideas and terminology used to evaluate variances.

Provide answers to the following questions (1)-(3).

1. Why might Sarah want to use standard costs to compare with her actual costs?

A) Management can evaluate the differences between standard costs and actual costs to focus on correcting the cost variances.

B) Standard costs give management a cost structure for products that is applicable for the entire life of the business.

C) Standard costs allow management to motivate employees by comparing their performance to what it would be under perfect conditions.

2. What are some possible drawbacks to using standard costs that Sarah might consider? Check all that apply.

A) Since standards are impossible to attain, they are a distraction from the work at hand.

B) Since standards never change, they do not reflect reality.

C) Standards limit operating improvements because employees may be discouraged from improving beyond the standards.

D) Employees may focus only on efficiency improvement and their own operations rather than considering the larger objectives of the organization.

E) Standards may become “stale” in a dynamic manufacturing environment.

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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