Question

• Characterize the use of standard costing and variance analysis for short-term financial control.
• What are the arguments against using standard costing and variance analysis (SCVA) for lean organizations? What are some of the key “flaws” of SCVA?
• What are the primary reasons more organizations have not discarded traditional approaches to short-term financial control?

Answer 1

Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.

Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variances.

Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.

• If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned.
• If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit. thus the manufacturing process can be easily managed by using standard costing and variance analysis for short term financial controll.   

lean organisation;A lean organization is committed to its customers and works to minimize waste by focusing all of its resources on producing the best possible value for customers.the main problem associated with using SCVA is that the lean organisation cannot account for a difference in actual and standard amount.it focus on optimum utilisation of resources , and so no waste or unplanned variations could be occured.

flaws of SCVA;standard costing may not be an accurate way to allocate cost to products as we cannot always identify how to allocate certain indirect costs to different products,as whether to based on the output quantity, or the input used , or the time consumed to use those particular resources etc...in these cases , activity based costing will be the better choice.

variance is the difference between actual and standard cost.and can be relied upon on certain conditions only.because the actual cost that occured mat be due to certain crisis, or unexpected economical environment.so there could be planning, operational, revised variances.and detailed investigation and study are needed to come to an exact point.this can be difficult for certain small organisations.

the reason behind the continued use of traditional approches to short term financial controll is that

either the organisation has not enough knowledge and technichal feasability to use more advanced approches or the organisation may insist on using the traditional approaches as they were , like before, and may be due to less information of the advantages of modern techniques, or may be that traditional approaches has been their convenient and profit earning way,based on their current situations.