This essay Standard Cost and Variance Analysis has a total of 1421 words and 6 pages.
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Standard Cost and Variance Analysis
Complete this matrix by providing at least 2 reasons why you agree and 2 reasons why you disagree with each of the following author’s statements (shown on page 17 of the article).
Support your arguments with at least 125 words for each agreement/disagreement.
Author’s Comment I agree because… I agree because…
“In the future, I envision more companies moving toward actual cost systems. Standard cost variance analysis will no longer be required because inventory transactions will be recorded at actual cost.” Standard cost variance is the difference between the
actual cost and the standard cost of a product or service. Managers and their accountants identify and analyze variances on a regular basis. This process is called variance analysis, and variances often signal
problems that may require investigation and possible action. With that understanding in mind, my agreement with the author’s comments is solely based on the fact that the actual cost accounting method clearly outlines the expenditures needed to acquire an asset, which includes the supplier expenses, plus the costs to deliver, set up, and test the asset. Understanding all of the definite expenses needed to run a department or purchase new assest allows a company to eliminate all potential cost variances, because they are working off of real data and not estiamations; therefore they are able to make well informed decisions of actual data, and not speculation.
I agree that some companies will move toward actual cost systems instead of using a standard cost variance analysis. The companies that I would expect to do this would be those who have costs that change frequently, such as a company manufacturing custom products and companies dealing with volatile raw material pricing. These types of companies will be dealing with mostly short term costs that can unexpectedly and frequently increase or decrease in size. The cost of their materials, overhead, and even labor are constantly changing as they are not producing the same thing over and over. If costs remained the same throughout the manufacturing process it would probably be better to use standard costing instead as there is usually not much change and conducting a standard cost variance analysis will show the cause of the variance in cost.
“This change will free up significant resources in the finance department and will allow cost analysts to function more as business partners within the organization.”
“The accounting focus will shift from variance analysis to understanding the underlying cost structure of a product or process, highlighting significant cost trends, identifying cost reduction opportunities and educating operations personnel on the financial impact of their day-to-day decisions.” Agreeance with this statement is based solely on the fact that the variance analysis determines what the company is saving within the process of operations on a day to day basis. The decision made to reduce cost in any form will be solely because of this variance. The variance can be either positive or negative in any given case and therefore the cost trends in which are revealed will have to be taken into consideration as well. Management can then take a look at the cost reduction opportunities and make an informed decision on which direction the company wants to go in. If it would be more profitable for them to decrease cost in the areas of production, labor or even materials. Educating operations personnel on the financial impact of the day-to-day decisions will in my opinion save the company time and money. It is understandable that the numbers not only have to add up but they have to be sound and make sense to do from a business stand point. Understanding why some financial aspects of day-to-day business cannot happen will make the operations personnel more attentive to the product and the cost associated with it. Operations personnel upon being educated about how their decisions impact the finances of the business will then be able to determine an appropriate amount of product to have on hand at any given time so that there is no excessive unused portion of product. The operations personnel can also make the necessary adjustments to the cost of completing the product as well as the process that it takes to complete the product.
“The analyst’s role will become proactive instead of reactive.”
Author’s Comment I disagree because… I disagree because…
“In the future,
Topics Related to Standard Cost and Variance Analysis
Management accounting, Costs, Corporate finance, Lean manufacturing, Cost accounting, Variance, Standard cost accounting, Inventory, Cost, Management by exception
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