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It provides a stable and sound basis for comparison of actual costs with standard costs according to different elements of costs separately.

It also shows places where remedial action is necessary and how far improvement is possible in the long run. It creates an atmosphere of cost consciousness among the office and managerial staff and workmen of the business.

Standard Costing | SpringerLink

It also provides incentives to workers, middle and top-level executives for efficiency. Standard costing assists management in the delegation of authority and responsibility to control the affairs of various departments. It assists management to put the men, machines and materials more effectively and reap the benefits of better economy, efficiency, and higher productivity.

Budgetary control system becomes far more effective when used in conjunction with the standard costing system. Standard costs being scientifically determined are very much useful for better planning and control. Compiling standard costs more carefully can eliminate the weakness of the traditional costing system.


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  • Analysis of Standard Costing System and Decision Making.
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Standard costs can be used as a yardstick against which actual costs can be compared. It is an effective tool for planning production costs. Hence, cost control is greatly facilitated. Variance analysis helps management to have regular as well as better checks over costs incurred. It makes the application of the principle of management by exception more easy. That is, the management can concentrate its attention on variances only, leaving the other aspects of cost control to be taken care of at the lower level.

Standard Costing

It is a valuable guide to management in the formulation of production and price policies in advance with certainty. It also assists management in the areas of profit planning, product pricing, and inventory pricing, etc. This means BWM got a fewer price in actual price, because it found a good supplier that can offer materials in fewer prices.

Standard Costing

About the material usage variance, the SQ is 10, kg 10, units? And the SP is? So the material usage variance is? The reasons about adverseness are company changed its quality control requirements, and changed methods of production. Managers can reduce the usage of materials through improving product design or use promotion and advertising to improve its sales. About the total material variance, the standard material cost SC is? So the total material variance is favourable? Or using the material price variance minutes the material usage variance?

This result is due to the fewer price of materials. However, managers need to reduce the usage of input. Actually the labour variance and variable overhead variance have the same formula to calculate quantity variance and price variances, that is, and. Because the process of variance analysis in these three parts is same and words are limited, the labour variance and variable overhead variance do not explain.

So the fixed overhead variance was?

The reasons about the differences between BFO and AFO may have a lot, such as the appointment of additional supervisors, or salaries of supervisors were changed. Managers are likely to think this variance is uncontrollable in a short term. Standard costing system and variance analysis may be used to any type and size of organizations, but not suitable for any type and size of organizations. Standard costing system is suitable for some companies which own different products under a series of common operations, such as manufacturing companies and service industries.


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However, some companies that own different operations do not be advised to use standard costing system, such as advertising firms. The cost of standard costing system is the most important reason. The variance analysis has the same situation. Definition When managers make future decisions, they have to consider relevant costs; otherwise, the decisions will be subjective or even wrong. In addition, the relevant costs include avoidable costs and opportunity costs. For example, if a firm purchase a new computer,? Opportunity is a tool to measure the cash benefit from the next most desirable alternative action Proctor, Irrelevant cost is the cost that is not about decision-making Davila et al, It includes 3 kinds of costs—sunk costs, committed costs, and non-cash costs.

Sunk costs are past costs; committed costs are about legal costs that will be paid in the future Proctor, ; non-cash costs are these costs that not cause any cash movement, such as depreciation. For example, employee morale and customer goodwill belong to qualitative factors. Shutting Down or Keeping Open Part of the Business Many organizations do periodical analysis to compare different profits between departments.

If the profit of a department is negative, the firm needs consider a lot of factors to determine close it or not. There is an example about discontinuation decisions at the below table. There are 3 departments—soap, shampoo, and body wash. Because there is a contribution of? Relevant and Irrelevant Costs and Incomes in Scenario?

Irrelevant costs are these costs that do not affect the decision. Depreciation of sales office equipment, apportionment of ware house rent, depreciation of warehouse equipment, and departmental and headquarters costs are irrelevant costs, as their numbers do not change. Qualitative Factors in Scenario? In this scenario, employee morale, customer loyalty, and relationship with suppliers are qualitative factors.

This may affect future output. Although reported profit of soap department was negative, its soap occupied 3. This will influence its long-term relationship with customers. At last, the close decision will break up the relationship with suppliers. This is not good for its future supply. Considering these qualitative factors, managers should not close soap department.

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Standard Costing and Variance Analysis

The cost-plus pricing means product costs are evaluated firstly and then a profit margin is jointed to decide the selling price Horngren et al, The target costing is reverse of the cost-plus pricing. The start point is to determine the target selling price and then target costs are be gotten by deducting a desired profit margin. The purpose of this approach is to confirm the future actual costs will less than the target cost Drury, In this assignment, the cost-plus pricing is mainly discussed. Companies can ensure costs first and then design future sales revenues to cover these costs.

There is an example about pricing customized products at below table. British CompanyMark-up percentage Cost-plus selling price? The situation is same in row 3. So the British Company makes? In this pricing decision, the market research is very important. Through this research, managers can determine a range of selling prices and sales volumes by comparing with similar product types. There is an example about pricing non-customized products at the below table.

Chinese Company Potential selling price? In the profit loss contribution, profits are maximized at?

Standard Costing - Easy and simple way to remember formulae