1) Explain how standard costs are established? How do managers evaluate performance using cost variance analysis?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
1) Explain how
2) How do you make a decision in case of special order? Explain. Use examples if required.
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Standard costs are those predetermined costs which the company is expected to incur on goods or services. These are called standard costs since the companies have set requirements or steps to be followed in order to manufacture a product or deliver a service. All the costs associated with the same are a part of the standard costs.
These are established to set expectations for the business to plan their expenses and budgeting and for the purpose of measurement against the actual costs. The standards set by the company may differ from the actual performance. Similarly, the cost set as per the standards may differ significantly from the actual costs.
For each direct labor, variable manufacturing overhead and direct material standard cost can be established. For direct material standard price and standard quantity is used, for direct labor standard hour and standard rate is used and for variable manufacturing overhead as well standard rate and the standard hour is used to establish standard costs.
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