Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 108

Evaluate the effects of erroneous standards During the year ended May 31, 2009, Teller Register Co. reported favorable raw material usage and direct labor and variable overhead efficiency variances that totaled $114,312. Price and rate variances were negligible. Total standard cost of goods manufactured during the year was $952,600.

Required:

a. Comment about the effectiveness of the company’s standards for controlling material and labor usage.

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b. If standard costs are used for valuing finished goods inventory, will the ending inventory valuation be higher or lower than if actual costs are used? Explain your answer.

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c. Assume that the ending inventory of finished goods valued at standard cost is $79,380. Calculate the adjustment to finished goods inventory that would be appropriate because of the erroneous standards.

Step 1 of 3

a) The aggregate value of raw material usage and variable overhead and direct labor efficiency variances is $114,312 and it estimates about 12% of the entire standard cost of goods produced every year ($952,600). This specifies that the company’s standards do not seem to be an effective tool for controlling the costs related to raw material, direct labor, and variable overhead.