The standard cost is a predetermined unit cost i.e. the price and standard amount of each resource to be utilized in manufacturing a product and providing a service. A variance is the difference of actual cost incurred and expected standard cost. The variance analysis involves breakup of total variance to explain how much variance is caused by difference in use of resources from the standard usage quantity and how much variance is caused by the difference in prices of resources from the standard costs (Scarlett, 2008, p.96). The standard costing can be advantageous only if the cost standards are carefully established and prudently used. The use of standards solely for placing blame can have negative impact on management and employees. The major advantages include better management planning, promotes economy by making the employees understand importance of cost reduction, setting selling price, management control, highlights variances in management by exception and simplify the inventories’ costs reducing clerical costs (Weygandt, Kimmel & Kieso, 2009, p.495). Standard costing system was developed in accordance with the traditional manufacturing environment which has changed drastically in recent competitive environment. The critics of standard costing and variance analysis site the following reasons for its declining relevance: Changing Cost Structure: Provided that the standard costing is suited to the control of variable and direct costs but not fixed and indirect costs, the usefulness of standard costing has been questioned because the in recent times the overhead costs have become the relevant factory costs whereas the importance of direct labour costs has diminished. Inconsistency with JIT (Just-in-Time) Philosophy: JIT is an inventory system which works towards keeping zero inventories and reducing handling, warehousing and financing costs and time associated with tracking stocks and movements (Ajami & Goddard, 2006, p.357). This system has been widely adopted by American and European firms in the last decade. Although critics of standard costing and variance analysis assert that if performance of purchasing department is evaluated on the basis of purchase price variance then the purchase managers will be motivated to obtain materials at the lowest possible costs which can result in selection of many suppliers on the basis of lowest price, large quantity purchases resulting in larger inventories, low quality goods and indifference towards attainment of on-time delivery. This contradicts the JIT philosophy. Overemphasis on the importance of Direct Labour: The fact that direct labour has lost its importance in modern manufacturing and is a small proportion of the total factory costs, makes the standard costing irrelevant because most of the overhead costs are allocated to the cost centres on the basis of direct labour hours. To reduce their allocated costs the managers try to reduce the direct labour hours which diverts the attention from controlling the rising overhead costs. This is not an inadequacy of standard costing rather a faulty application of it to rely on volume variances to control short term costs and performance evaluation. Inconsistent with Continuous Improvement Philosophy: The
Relevance of Standard Costing & Variance Analysis Contents Contents 2 Introduction 3 Critical Analysis of Standard Costing & Variance Analysis 3 Conclusion 6 References 7 Bibliography 7 Introduction This project involves a critical analysis of the standard costing system and variance analysis in modern management…
The Maniac Plc deals with the sale and production of normal electrical goods. A full evaluation of costing requirements has conducted by the organization to recognize those regions which have not met financial plan expectations. The models and concepts which affect the pricing decisions of a firm are management accounting decisions.
The traditional costing system had been a very common cost accounting system used during the 19th century. This report discusses the rise and the common use of the traditional costing system within many different manufacturing organizations.
A method such as mean-variance analysis helps predict and reduce the amount of risk in an investment. Holding a mix of assets, otherwise known as portfolio diversification, is a key concept upon which successful investments in the business world gain greater practicability and predictability.
The analysis stops when additional complexity is not outweighed by additional 'actionable' insights." (Shank and Churchill, 1977. P 950-957).
Through this process, it is possible to determine areas in which the management accountability is low, or adverse and thus would require better control, and remedial measures need to be implemented so that the adverse variations could be checked and eliminated in the near future.
The critical evaluation of how standard costing works is very important in this paper's quest in finding proofs to support the claim of an author that standard costing is appropriate for organizations that are greatly involved in common or repetitive operation.
The Terminology of Cost Accountancy defines standard costing as “the preparation and use of standards costs, their comparison with actual costs, and analysis of variances to their causes and points of incidence.” The technique of standard
The functions of the management include planning, organising, controlling and monitoring. Management accounting provides the required information to the management to carry out the business operations in an arranged manner. The
This project involves a critical analysis of the standard costing system and variance analysis in modern management. Due to shift in cost structures and factory automation the process of standard costing has been criticised due its declined relevance and contradiction with the modern manufacturing philosophy of JIT and continuous improvement.
Also, the company’s total revenue during the three years increased as well. In this regards, there was a rise of $1,454,342 in the company’s total revenue in 2006. In 2007, there was commendable increase by
ce may be due to unplanned price reduction from the planned £ 15.00 to £ 14.50while the adverse sales volume variance may be articulated to unexpected fall in demand or production difficulties. Both material L10 and L17 had an adverse price variance, which may have been caused
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