Question

I have a question on standard costing. What should management do when actual cost exceeds the standard cost?

Answer 1

• The general response and action by management if the actual cost exceeds the standard cost will be to CONTROL the excess cost in the coming period.
• For doing that, the management needs to do a thorough analysis regarding the causes for such excess cost.
• Variance Analysis is one of the method that can used to study the reason for excess of Actual cost over Standard Cost.

Variance Analysis involves calculation of various variances like:
-Material Price Variance, which tells the reason of difference between actual and standard cost due to price.
-Material Usage Variance, which tells the reason of difference between actual & standard cost due to usage of material.
-Labor variances [rate & efficiency] tells the management the reason for difference in actual cost and standard cost is due to wage rate and no. of hours consumed.

• One the basis of the above Variance analysis and other steps, management can adopt following measures:

-Direct production department to use material more efficiently,
-instruct and help workforce to work more efficiently.
-look out for the rise in material prices and wage rate.
-revise the standard costs if circumstances ask for, like during inflationary conditions.