Question

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.

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.

Answer 1

Answer:

1. The reason Sarah might want to use standard costs to compare with her actual costs is:

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

2. Drawbacks of using Standard Costs are:

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.

Explanation:

Standard costs encourage the pursuit of management goals.  They are the costs that should be under a particular type of circumstances.  They are usually compared with actual costs to determine their differences or variances.  Their use helps management to focus on how to improve overall performance.