Relevance of Standard Costing & Variance Analysis Essay

Relevance of trite Costing & Variance Analysis - adjudicate ExampleThe cadence cost is a predetermined unit cost i.e. the price and standard amount of each resource to be utilized in manufacturing a product and providing a service. A partitioning is the difference of actual cost incurred and expected standard cost. The variance epitome involves breakup of total variance to explain how much variance is caused by difference in use of resources from the standard usage quantity and how much variance is caused by the difference in prices of resources from the standard be (Scarlett, 2008, p.96). The standard costing can be advantageous only if the cost standards are carefully established and prudently used. The use of standards entirely for placing blame can have negative impact on management and employees. The major advantages include better management planning, promotes economy by making the employees make importance of cost reduction, setting selling price, management control, h ighlights variances in management by exception and simplify the inventories cost reducing clerical costs (Weygandt, Kimmel & Kieso, 2009, p.495). Standard costing system was developed in accordance with the traditional manufacturing environment which has changed drastically in recent competitive environment. The critics of standard costing and variance analysis site the following reasons for its declining relevance Changing Cost Structure Provided that the standard costing is suited to the control of variable and direct costs but not fixed and indirect costs, the usefulness of standard costing has been questioned because the in recent times the overhead costs have become the relevant factory costs whereas the importance of direct labour costs has diminished. Inconsistency with JIT (Just-in-Time) Philosophy JIT is an inventory system which works towards keeping zero inventories and reducing handling, warehousing and financing costs and time associated with tracking stocks and movemen ts (Ajami & Goddard, 2006, p.357). This system has been widely adopted by American and European firms in the last decade. Although critics of standard costing and variance analysis allege that if performance of purchasing department is evaluated on the hindquarters of purchase price variance then the purchase managers will be motivated to obtain materials at the lowest possible costs which can result in selection of many suppliers on the basis of lowest price, large quantity purchases resulting in large inventories, low quality goods and indifference towards attainment of on-time delivery. This contradicts the JIT philosophy. Overemphasis on the importance of Direct Labour The fact that direct labour has lost its importance in modernistic manufacturing and is a small proportion of the total factory costs, makes the standard costing irrelevant because most of the overhead costs are allocated to the cost centres on the basis of direct labour hours. To reduce their allocated costs the managers try to reduce the direct labour hours which diverts the attention from controlling the rising overhead costs. This is not an inadequacy of standard costing rather a faulty application of it to rely on volume variances to control short term costs and performance evaluation. Inconsistent with uninterrupted Improvement Philosophy The