Over half of companies using standard costing based their reports on actual costs. During the late 1980s, academics such as Johnson and Kaplan (1987) argued that standard costing and variance analysis were inadequate for cost control and performance evaluation purpose due to the changing competitive environment. For example, if labor efficiency variance is seen to be unfavorable or procurement of raw material cost variance is unfavorable, the management can enhance control of these departments to increase efficiency. ... Further investigation should reveal whether the exception or variance was caused by the inefficient use of materials or resulted from higher prices due to inflation or inefficient purchasing. To make the purpose clearer we will some more purpose of standard costing. Most of these problems result from improper use of standard costs and the management by exception principle or from using standard costs in situations in which they are not appropriate. Standard costing is used alongside budgeting because the components for its products are identical and the manufacturing process is repetitive. The Learning-Curve Effect28 II. The showing of efficiency leads to favorable variance. Using standard costing as a budget accountant. Standard costing is the establishment of cost standards for activities and their periodic analysis to determine the reasons for any variances. Technological industry: The variance analysis and standard costing system is not so suitable for a dynamic industry such as technological one.
This is done by calculating the rate and efficiency variances. Project managers will conduct a variance analysis at each and every milestone of … 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.
Variance Analysis for A Variable Costing System28 III.
This has been a guide to What is Variance Analysis. In an organisation that uses JIT, the usage of standard cost budgeting and variance analysis can lead to a behaviour that is dysfunctional as JIT focuses on massive inventory reduction so that goods are produced in small batches in accord with the current demand.
The use of standard costs can present a number of potential problems or disadvantages. Standard costing allows us to analyse this overall variance, and understand how much of it is the result of paying a different rate to the standard and how much is due to more or less units being produced than expected.