Question

There are several potential problems that can occur from the improper use of standard costs. Labor quantity standards and efficiency variances are just a few of these problems. Discuss other potential problems that can occur from the improper use of standard costs. How would you recommend overcoming these problems?

Answer 1

The improper use of standard costs can present a number of potential problems that are as follows:

• Standard cost variance reports are usually prepared on a monthly basis and often are released days or even weeks after the end of the month. As a consequence,the information in the reports may be so outdated that it is almost useless.
• If managers are insensitive and use variance reports as a club, morale will suffer. Management by exception tends to focus on the negative. If variances are used as a club, subordinates may be tempted to cover up unfavorable variances or take actions that are not in the best interests of the company to make sure the variances are favorable.
• Labor quantity standards and efficiency variances assume that production is labor-paced. However, output in many companies is determined by the processing speed of machines. Second, the computations assume that labor is a variable cost. Direct labor may be essentially fixed. If labor is fixed, then an undue emphasis on labor efficiency variances creates pressure to build excess inventories.
• Sometimes a “favorable” variance can be as bad or worse than an “unfavorable” variance. Favorable variances can lead to substandard products and dissatisfied customers.
• Too much emphasis on meeting the standards may overshadow other important objectives.
• Just meeting standards may not be sufficient; continual improvement may be necessary to survive in a competitive environment.