Purpose of standard costing systems and variance analysis.
It has been psychologically proven that when goals are set that are difficult to obtain, most people “will exert the greatest effort1” in order to obtain the desired goal. In regards to management accounting, a standard cost puts this theory to the test. The budgeted production cost for one unit of output is the standard cost for that unit, thus, it is a predetermined figure, allowing management to reach a certain target that is necessary for the business to operate at an optimal and desired level.
Eighty-Six Percent of U.S manufacturing firms rely on standard costing systems4; a system that goes through the process of initially recording the cost of production per unit, to find the predetermined rate (Standard). The purpose of this system is to provide users with improved information for financial analysis, by comparing standard costs with actual costs.
Variance analysis involves the comparison of these standard and actual costs in order for management to ascertain valuable performance indicators. The difference between the standard cost and actual cost is called the variance6. It is a “managerial accounting method used to determine the difference or variance between actual operating results (actual unit cost) and expected results (unit cost goal) 2” The actual cost being “What happened5”, as the results are only available at the end of the period, and the standard cost being “Where we are going5”, as the standard cost system reveals what is happening during the manufacturing process. This analysis can be utilized early on in the financial year, to identify any positive or negative trends within the manufacturing process.
2) Benefits to Van Villain of using Variance Analysis
Van Villain will greatly benefit from the use of Variance Analysis in the following ways:
• Identifies where and why discrepancies have transpired. This allows management to implement managerial strategies to...