Question

Discuss the advantages and disadvantages of each of the following approaches in setting standard costs: (a) setting ideal standards vs. attainable standards. (b) holding the purchasing department responsible exclusively for material price variances and nothing else vs holding them accountable for some index which includes material price variance plus variances (favorable and/or unfavorable) in material usage variances. (c) analysis of individual variances vs analysis of groups of variances, including the interplay between variances like labor cost + labor quantity variances?

Answer 1

Answer to all parts are proovided below:

Adavantages and disadvantages of ideal standards

Advantages

• Motivation of hardworkers as the ideal standards are rarely achievable.
• It encourages employees to act with the increased responsibility in factors which are not under their control such asmachine downtime, rest period etc.

Disadvantages

• As theideal standards are generally unattainable they can become demotivating for employees.
• The ideal standards results in adverse variances.

Advantages and disadvatages of Attainable Standards

Advantage

• Attainable standards are more preferred as they are prepared according to current conditions.
• It incorporates all the important factors such as wear and tear, breakdowns, accidents, employee burnout etc.

Disadvantage

• It is relatively time consuming and expensive.

Advantages and Disadvantages of holding the purchasing department responsible exclusively for material price variances and nothing else

Advantage

• If the purchasing depratment will be inlcuded only for material price variances then it would help in avoiding unfavorable price variances. For example: If actual price paid is more than the standard price, an unfavourable material price variance would occur.

Disadvantage

• A sole concentration on material variance will result in unfavourable usage variance, mix variance, etc if left unchecked.

Advantages and Disadvantages of holding them accountable for some index which includes material price variance plus variances (favorable and/or unfavorable) in material usage variances.  

Advantage

• If the purchase department will be held accountable for other indexes in addition to material variance, then there would be favourable variances.

Disadvantage

• Merely determing and answering about the variances is not enough, the manager should also get into the details of real reason behind such differences. For example, sales variance could be due to inflation.

Advantage and Disadvantages of Individual variance and Group Variance

If single variance is determined withh entire concentration, it helps in minimizing errors. At the same tiime if the variances are not determined in relation to one another, i.e., group variance, then it may end up useless.