Question

Open a new thread on the discussion board. Discuss ideal standards versus currently attainable standards. Which is usually adopted? Why? How does standard costing improve the control function? What is the cause of an unfavorable volume variance? Does the volume variance convey any meaningful information to management? Should the volume variance always be written off to the cost of goods sold?

Answer 1

Ideal standards are perfection standards and they represent the optimal outcomes or the best possible outcomes. On the other hand currently attainable standards are those standards that allow for inefficiency and hence do not represent the optimal outcomes or the best possible outcomes.

Of the two standards discussed above it are the currently attainable standards that are usually adopted. This is because many people think that currently attainable standards serve the purpose of motivating while ideal standards can lead to frustrations in majority of cases and situations.

Standard costing improves the control function by identifying standards in the first place and then determining and evaluating deviations from the standards that were determined earlier. This determination of deviations allows the managers to define areas in which a corrective measure has to be implemented.

Unfavorable volume variance occurs when the amount of fixed manufacturing overhead costs that are applied to the output is less than the budgeted quantum of fixed manufacturing overhead costs. This is mainly caused by actual output being less than the planned output. Volume variance does convey meaningful information to management with regards to the amount of fixed manufacturing overhead costs that are being applied to the output. It will also enable management to determine appropriate changes in selling price that will be required to achieve that level of sales that is assumed in the denominator of the fixed manufacturing overhead rate.

No, the volume variance should not always be written off to the costs of goods sold. If the variances are material then they should be allocated to work in process control, finished goods control and cost of goods sold. This will be done on the basis of variable overhead that is allocated to these three accounts.