Question

Give specific explanation: what are benefits using standard costing for manufacturing business like Ford Motor Company from the standpoint of pricing products or services, performance evaluation, and financial reporting?

Answer 1

Standard costing - It is a method of costing used mostly by manufacturing businesses to find the variances in expected and actual costs. Variances are the differences in the actual costs incurred and the costs that were supposed to incur.

Standard costing has certain advantages to the manufacturing companies in terms of:

Pricing products or services -

Pricing of products is easier in standard costing. Standard are set and then production done on the basis of it. The variances are minimized by altering the method of production. As long as variances are small, it is beneficial and as the variances grow the costs may become higher or lower depending upon the favorable or unfavorable variances. When the changes have been made to production process and the variances minimized, it is easier to set the price or products or services. The prices reflect all the costs associated and variances taken into consideration so that there is no loss to the business due to unfavorable variances.

Performance evaluation -

Standards are the measure of performance and the performance should be near to these standards. Performance is evaluated for materials and labor separately and efficiency variances are calculated to know the performance of these overheads. It may be favorable or unfavorable. Favorable is when the actual costs are less and vice versa. Sometimes, variances can also be due to unavoidable circumstances.

Financial reporting -

Actual expenses must be reported in financial statements according to GAAP and IFRS. To be in compliance with these standard costing can be used to report as long as variances are also reported in the financial statements. It is easier to report standard costs and calculation is easy.