Even considering the fact that standard costing can create variances between standard cost and actual cost, this system is the most commonly used costing system in all around the world. Standard costing provides easier to predict the cost and understand the cost, and also easier in decision making as well. Standard costing also required less time consuming for the management to record and maintain the system.
Standard costing is the system that organized cost for activities and the record to decide the cause for any variances. Standard costing can be a system to helps management account to calculating costs.
For example, the company predict the labour cost at the beginning of a year $3 per unit. After certain time, the actual cost per unit goes up to $3.05 and company needs to compared it to the standard cost and decides if they have succeeded in controlling cost or not.
Variance analysis is when we compare the actual costs and standard costs, and it helps to control the costs and also create much more accurate and help to make more profit. If actual cost is bigger than the standard costs, it is an unfavorable variance, if actual cost is less than the standard cost, it is a favorable variance.
Whereas normal costing uses actual costs (or as close as can be determined), standard costing values manufactured products using predetermined costs and rates for materials, direct labor, and manufacturing overhead. These standard costs are used to come up with COGS and to value inventories. If the actual costs vary only slightly from the standard costs, the resulting variances will be assigned to the cost of goods sold. If the variances are significant, they should be prorated to the cost of goods sold a...
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...ompany has no standardised production procedures which leads large differences between departments, including wastefulness;
3. Company has no clear understanding on how to predict material usage;
4. Differences in quality of material leads to higher waste in some departments.
This issue should be addressed in near future in order to gain consistency between standard and actual costs.
2. Difference between price per unit of material. Partially, this factor is not depending on company. These materials are being sourced from partners and are subject to changes in changes of raw material world prices. The company might consider either locking prices from their suppliers for future period or can use floating prices that are subject to change. First option is preferred when prices are stagnating or raising, second option is better in environment where prices are falling.
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