Standard Costing and Variance Analysis Introduction

Any decision taken or estimates made without inflation would not be correct. Rate of inflation will have impact on future cash flows and profitability of the concern. Before any estimates made or standards set, the difference between money rate of interest and real rate of interest, the difference between them should be taken as rate of inflation. In a business organization where only single product is manufactured, produced or dealt, it is simple to identify costs with that single product. But when a concern manufactures different varieties of products, it is difficult to aggregate production expressed in different units.

Impact on the Financial Statement

(c) Unless standards are accurately set any standard costing system performance evaluation will be meaningless. (g) The cost of setting up and maintaining a system for establishing standards. (a) Deciding how to incorporate inflation into planned unit costs.

Selling Price Determination

Engineer­ing specifications and production plans should be the basis for setting quantity standards. The purpose of setting standards is to fix yardsticks for measuring the performance of various activities and helps in unearned revenue responsibility accounting. Overhead recovery rates has to be determined in advance and applied on that basis to product/cost centres. There is always a difference in actual expenditure and overheads absorbed.

Responsibility for Setting Standards

This section begins with a discussionof the nature of standard costs. Next, we explain how managers usestandard costs to establish budgets. Then we describe howmanagement uses the concept of management by exception toinvestigate variances from standards. We also explain settingstandards and how management decides whether to use ideal orpractical standards. The section closes with a discussion of theother uses of standard costs.

These standards can be used to make financial projections and to evaluate performance by comparing the standards to actual performance at the end of the period. Any discrepancy between the standard and actual costs is known as a variance. Standard variances are considered a red flag for management to investigate and determine their cause.

Product costing methods for business success

Various operational inefficiencies are buried in it, and it does not reflect intervening changes in the methods of production, levels of activity, market trend, etc. As we’ve explored, accounting for standard costing is a vital tool for controlling and managing your business expenses. By setting clear cost standards and comparing them with actual costs, you can quickly identify areas of overspending and take corrective actions. This method helps you stay on budget and make better financial decisions. The production that is acceptable (not rejected products) and which is assigned manufacturing costs of direct materials, direct labor, and manufacturing overhead.

What is Variance Analysis? Definition, Explanation, 4 Types of Variances

Much of the clerical work can be eliminated by maintaining stock records in quantitative terms. Similarly, pricing of bills of materials or requisitions takes much lesser time as compared to the time required in pricing at actual cost. Preparation of cost reports becomes easier under the standard costing system.

Standard cost accounting

The manual should describe the system to be introduced and the benefits thereof. It is equally necessary to specify the classification of accounts, and coding incomes and expenses to facilitate speedy collection and analysis. (1) Organisation Structure – Car Dealership Accounting Standard costing demands the existence of a sound organisation structure with well-defined authority relationships. The organisation chart showing such relationships is of considerable use in supplying the basic data with regard to different operations and the personnel in-charge of those operations.

• Ideal standards are not widely used in practice because they may influence employee motivation adversely.
• (4) Co-operation of Executives and Staff – For the successful working of a standard costing system, it is necessary to enlist the co-operation of executives and the staff operating the system.
• The real costing system must always be considered, even if a traditional accounting method is employed.
• Ideal standards are those that can be attained only under the best circumstances.
• It is very difficult to analyse such expenses for each product separately.

• The technique is known as “standard costing” when standard costs are used for cost control.
• Standard costing is a powerful tool used by businesses to achieve several key objectives that drive financial and operational efficiency.
• Predetermined costs are computed in advance on basis of factors affecting cost elements.
• Also, it does not predict the future of the company’s status accurately.

The $240 variance is favorable since the company paid $0.08 per yard less than the standard cost per yard x the 3,000 yards of denim. While basic standards are used in a business over a long period of time, current standards are developed for a short period of time. These standards are developed and implemented in during specific circumstances and once these circumstances are over, the business reverts back to long-term standards.