Question

Answer the following questions in a 400-600 word response [total for both] or 200-300 words each question. 1. The analysis of standard cost systems begins with the development of standards for direct materials, direct labor, and manufacturing overhead. Discuss standard costs and indicate how they can be used by management in planning and control. 2. Why is it important to consider the relationship among cost, quality, and selling prices when establishing standards for direct materials?

Answer 1

1.

Standard costing is the costing method in which costs are calculated based on predetermined costs. If the actual cost are higher than the standard or budgeted cost, there will be unfavorable variance and when the actual costs are lower than the standard cost, there will be favorable variance. Standard costs are generally set for manufacturing costs like direct materials, labor and manufacturing overheads.

By setting up standard costing, the management intends to put a control over these costs as the favorable and unfavorable variances need to be explained by the concerned manager associated with purchase and production of units

When there is huge unfavorable variance, the reason for actual cost escalation needs to be tracked if there is need to explore other suppliers , revision in terms and conditions of vendors. Also, in case of huge unfavorable cost due to general increase in the price of raw materials, the company may consider sales price revision also. Hence, review of unfavorable variances helps in understanding the difficulties faced by the business

Favorable variances are generated when standard costs are lower than actual costs. There may be several reasons for the same. Reduction in raw material prices, increase in supply of labor. It might also be possible that the standards costs were set higher to present improvement in divisional performance.

Thus, the analysis of variances generated by using standard costing helps the management in understanding the business operations and help in planning production and pricing strategy.