Question

Standard cost systems set budgets for the materials, labor, and factory overhead used by a manufacturer to produce its product. Deviations from these standards are reported as variances. In ch.23, we learned that manufacturing firms set standards for the amount and price of direct materials, direct labor, and overhead consumed by their products. Standards establish a benchmark to be used in evaluating actual performance. They allow management to recognize when costs are not in line with the company’s projections and to take corrective action. Standards-variance analysis cost control system can be applied to non-manufacturing businesses, provided that they use repetitive activities to produce a common product or service. Based on your own real-life experience, describe and discuss a non-manufacturing (service) business that could benefit from the use of standards. Also explain how standards would help that business control its operations.

Answer 1

Standard costing is a costing method used to setting performance standard that helps businesses to compare their actual performance with budgeted.

Standard costing in service industry helps to ascertain price differences, determining cost. Here we consider the example of audit firm for standard costing system.

Standard costing for service sector helps to fix price per product i.e.delivery of services. It helps to compare budgeted services volume and actual services. And analysis of variance for standard fees for services and actual fees for services

In non manufacturing companies standard costing applied to determine labour variance, material variance, overhead variances.

Direct material in service industry is the office equipments, computers, printers and other equipments used in providing professional services. Standard costing used in variance actual cost of service provided by each equipment.

Direct labour in service sector is employee salaries, salary of professionals salary of office staff. Standard costing methodology used to ascertain labour rate and also labour efficiency. It is beneficial for understanding the efficiency of the employees, professionals and rate to determine for overtime because in audit firm no.of hours worked more than normal working hours.

Standard costing helps to analyse overhead variance, overhead cost such as travelling cost, office expenses in service sector company. And it helps to limit the excess cost expended.

Standard costing in non manufacturing industry helps to

1. Helps to understand differences in traditional costing system and standard costing system.

2. Beneficial for labour efficiency and determine no.of excessive hours worked.

3. Variance between actual Services and budgeted.

4. Helps to determine productive services performed by professional.

Using standard costing helpa to control operations

Standard costing helps to compare actual cost with standard cost based on this management can place control over cost and analyze the reasons.

Helps to understand weakness in traditional system, using this management can control unnecessary activities.

Helps to management to effective use of labors and materials that reduces the ineffective cost.

With the use of standard costing management can control deficiencies in production system.

Management can control excess cost incurred

Controlling ineffective activities.

Standard costing help management to ascertain drawbacks in sales traget and reduction in such drawbacks.