Relevance of Standard Costing & Variance Analysis Essay

Relevance of modular Costing & Variance Analysis - Essay ExampleThe regular cost is a predetermined building block cost i.e. the price and criterion amount of each resource to be utilized in manufacturing a product and providing a service. A random variable star is the difference of actual cost incurred and expected standard cost. The variance analysis 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 cautiously established and prudently used. The use of standards solely for placing blame can have negative impact on management and employees. The major advantages include better management planning, promotes economy by making the employees understand enormousness of cost reduction, setting selling price , management control, highlights variances in management by exception and simplify the inventories costs reducing clerical costs (Weygandt, Kimmel & Kieso, 2009, p.495). Standard costing system was developed in accordance with the handed-down manufacturing environment which has changed drastically in recent competitive environment. The critics of standard costing and variance analysis spot the fol pitifuling reasons for its declining relevance Changing Cost Structure Provided that the standard costing is suited to the control of variable and target 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 parturiency costs has diminished. Inconsistency with JIT (Just-in-Time) Philosophy JIT is an inventory system which works towards keeping zipper inventories and reducing handling, warehousing and financing costs and time as sociated with tracking stocks and movements (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 assert that if work of purchasing department is evaluated on the basis of purchase price variance then the purchase managers allow 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 larger 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 modern 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 emanation overhead costs. This is not an inadequacy of standard costing rather a faulty application of it to verify on volume variances to control short term costs and performance evaluation. Inconsistent with Continuous approach Philosophy The