Question

As an incredibly successful executive in Miami, FL Vinay is very busy hitting the beach and preaches the philosophy of management by exception. How does the use of standard costs fit with the philosophy of management by exception?

Answer 1

Answer :-

Role of Standard Costs in Management by exception

A standard cost is the predetermined cost of manufacturing a single unit or a number of product units during a specific period in the immediate future. It is the planned cost of a product under current and / or anticipated operating conditions.

Management by exception is the practice of examining the financial and operational results of a business, and only bringing issues to the attention of management if results represent substantial differences from the budgeted or expected amount.

Standard costs are an important element in a management by exception approach. e.g. If costs conform to the standards, managers can focus on other issues but if costs are significantly outside the standards, managers are alerted that problems may exist that require attention.

Standard costs can simplify bookkeeping to a great extent. Instead of recording actual costs for each job, the standard costs for direct materials, direct labor, and overhead can be charged to jobs.

Standards provide benchmarks that individuals can use to judge their own performance and as a result promote economy and efficiency.

Conclusion :- Based on the aforementioned points, it can be concluded that the use of standard costs fit with the philosophy of management by exception.