Question

Chapter 8 in Horngren's cost accounting 16th edition textbook A company using standard costing allocates fixed cost to each unit produced based on an output determined before the accounting period begins. Why is this a valuable technique and why, on the other hand, does it give rise to a production volume variance?

Answer 1

Why it is important?
A.Improved cost control Companies can gain greater cost control by setting standards for each type of cost incurred and then highlighting exceptions or variances—instances where things did not go as planned. Variances provide a starting point for judging the effectiveness of managers in controlling the costs for which they are held responsible.
B.More useful information for managerial planning and decision making When management develops appropriate cost standards and succeeds in controlling production costs, future actual costs should be close to the standard. As a result, management can use standard costs in preparing more accurate budgets and in estimating costs for bidding on jobs. A standard cost system can be valuable for top management in planning and decision making.
‌C.More reasonable and easier inventory measurements A standard cost system provides easier inventory valuation than an actual cost system. Under an actual cost system, unit costs for batches of identical products may differ widely. Under a standard cost system, the company would not include such unusual costs in inventory. Rather, it would charge these excess costs to variance accounts after comparing actual costs to standard costs.
D.Cost savings in record-keeping Although a standard cost system may seem to require more detailed record-keeping during the accounting period than an actual cost system, the reverse is true.

Why Production volume variance arise?

Production volume variance is a statistic used by businesses to measure the cost of production of goods against the expectations reflected in the budget. It compares the actual overhead costs per unit that were achieved to the expected or budgeted cost per item.

The formula for production volume variance is as follows:

Production volume variance = (actual units produced - budgeted production units) x budgeted overhead rate per unit

Factory rent, equipment purchases, and insurance costs all fall into this category. They must be paid regardless of the number of units produced. Management salaries do not usually vary with incremental changes in production.

Other costs are not fixed as volume changes. Total spending on raw materials, transportation of goods, and even storage may vary significantly with greater volumes of production.

Production volume variance can be considered a stale statistic. It may be calculated against a budget that was drafted months or even years before actual production. For this reason, some businesses prefer to rely on other statistics, such as the number of units that can be produced per day at a set cost.