Question

2) While calculating the costs of products and services, a *standard costing system* ________.

A) allocates overhead costs on the basis of the actual overhead-cost rates
B) uses standard costs to determine the cost of products
C) does not keep track of overhead cost
D) traces direct costs to output by multiplying the standard prices or rates by the actual quantities

Answer 1

A standard costing system uses predetermined standard costs to determine the costs of products and services, rather than actual overhead rates. The costs are predetermined and direct costs are traced to the output by standard rates, so the correct answer is that it uses standard costs for product costing.

Step-by-step explanation:

A standard costing system uses standard costs to determine the cost of products and services. Contrary to actual costing, which would allocate overhead costs based on the actual overhead-cost rates, standard costing utilizes predetermined costs for its calculations. Direct costs in such a system are traced to output by multiplying the standard prices or rates by the actual quantities used. Whereas 'overhead' or fixed costs are planned out in advance and spread over the units of output which, when divided by the quantity of output produced, gives you average fixed cost. Therefore, the correct answer is B) uses standard costs to determine the cost of products.

The notion of 'spreading the overhead' refers to distributing these fixed costs across all units produced, which decreases as the quantity of output increases - hence explaining the shape of the average fixed cost curve as downward sloping.