a) How do standard costs are developed. b) How do we calculate and interpret variances for direct...

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Accounting

a) How do standard costs are developed.
b) How do we calculate and interpret variances fordirect materials.
c) What are the advantages and disadvantages ofdecentralization.

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aStandard costs should be established by the authority ormanagement so that the same may be acceptable Establishment ofstandards may not be a simple task depending on the nature of theproduct and the intricacies involved in its manufacture Indeveloping standards the following should be taken intoconsideration1 The basic cost factors physical and monetary The physicalfactor relates to the unit of measurement of the cost elementsinvolved in the production process like the number of lumber unitsthat are utilized to finish the boxes The monetary factor relatesto the amount paid for the physical factors which in ourillustration is the price per unit of lumberA formula is thereby formed from these cost factorsCost Physical Factor multiplied by the MonetaryFactorSuch formula will later be understood by presenting the data forDollar Company2 Specification of the Product this is necessary to determinethe physical and monetary factors needed in the computation of themanufacturing elements such as materials labor and factoryoverheadThe following specifications are set up for BENGRSize of the Product 2 x 2 x 2 2 feet long 2 feetwide and 2 feet highColor walnut varnishThe cost accountant therefore should remember that in creatingstandards for the elements of costs direct material direct laborand factory overhead the two most important things are consideredthe physical aspect units of materials number of hours workedand the monetary factor price per unit material and the labor rateper hourStandards can be set up for any kind of business activities butthey are most useful to manufacturing because a manufacturingprocessing is quite complicated compared to a trading or a serviceconcern businessbThe total direct materials variance is comprised of twocomponents the direct materials price variance and the directmaterials quantity varianceTo compute the direct materials price variance take See Answer

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