8.1. Usefulness of Variance Analysis
Standards and variance analyses resulting from them are essential in financial analysis and decision making.
Advantages of Standards and Variances
Aid in inventory costing
Assist in decision making
Sell price formulation based on what costs should be
Aid in coordinating by having all departments focus on common goals
Set and evaluate divisional objectives
Allow cost control and performance evaluation by comparing actual to budgeted figures. The objective of cost control is to produce an item at the lowest possible cost according to predetermined quality standards.
Highlight problem areas through the "management by exception" principle
Pinpoint responsibility for undesirable performance so that corrective action may be taken. Variances in product activity (cost, quality, quantity) are typically the production manager's responsibility. Variances in sales orders and market share are often the responsibility of the marketing manager. Variances in prices and methods of deliveries are the responsibility of purchasing personnel. Variances in profit usually relate to overall operations. Variances in return on investment relate to asset utilization.
Motivate employees to accomplish predetermined goals
Facilitate communication within the organization, such as between top management and supervisors
Assist in planning by forecasting needs (e.g., cash requirements)
Establish bid prices on contracts
Standard costing is not without some drawbacks, such as the possible ...
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