Standard costing and variance analysis

Standard costing is a predetermined cost for materials, labours, expenses and overheads in advance of incurred, then compares these costs with accrual costs as they are incurred. (Meanwhile, it is different from budgeted cost. They are target cost that should be incurred under efficient operating conditions. ) In recent years, writers such as Kaplan and Johnson, Ferrara and Monden and Leehave argued that standard costing variance analysis should not be used for cost-control and performance-evaluation purposes in today’s manufacturing world.

Its use, they argue, is likely to induce behaviour which is inconsistent with the strategic manufacturing objectives that companies need to achieve in order to survive and prosper in today’s intensely competitive international economic environment. Standard costing variance analysis continues, however, to be included in undergraduate curricula and professional examination syllabuses.

Students, having struggled through the learning process, may be dismayed to discover that many consider the knowledge they have acquired obsolete. It could be argued that standard costing variance analysis is still widely used in practice and this is sufficient justification for learning about it. The mainstream of management accounting, however, has always been prescriptive — specifying best practice rather than merely descriptive — simply describing what goes on in practice for better or worse.

The inclusion of, and certainly the importance attached to, standard costing variance analysis in management accounting syllabuses is therefore an issue in need of clarificationVariances are the differences between standard cost and actual costs. Variances allocated to responsibility centers. Use above example: if the responsible centers are A, B and C for each of the operations 1,2 and 3, so the cost control requires that the A, B and B be identified with the standard cost for the output achieved.

If the total actual cost for the output of the 5 items produced in responsibility center B is i?? 150, but the total standard cost is i?? 100, thus a variance of i?? 50 will be reported by center B. The variances can be identified by each element of cost and analysed according to the price and quantity content. For example, a accountant might identify the reason for a direct materials variance because of excessive usage of a certain material in a particular process, but the managers in the responsibility center must investigate the reasons for the variances.