Question

Q1. How should a standard cost system and variance reporting be used by a company? Let's discuss some processes for using this type of information.

Q2. How should variances be used by a company?

Q3. Are favorable variances always good and unfavorable variances always bad? How should variances be interpreted?

Answer 1

ANSWER-1)

Standard cost refers to the realistic estimates of cost based on analyses of the past and projected operating costs and rules. The costing utilizes estimated costs exclusively to calculate all three elements of product costs: direct materials, direct labor, and overhead.

The main three components of standard costing used by a company are:

–Standard costs, that gives a standard, or predetermined, performance level

–Actual performance measurement

–A measure of the variance between actual and standard performance

Standard costing system fulfils a number of processes of the company such as planning, control, reporting and recording

Variance analysis refers to the process of calculating the differences between actual costs and standard costs and identifying the reasons of those differences. Variance reporting by a company has four steps:

–Calculating the variance amount.

–Determine the reason of any significant variance

–Identification of the performance measures that will track such activities, analyze the causes of the tracking, and determine what is required to correct the problem.

–Taking the corrective action

Variances helps in processes such as cost variances and sales variances to know the financial difference between expectation (revenues or costs) and reality (actual revenues and costs).