Of the several uses of standard costing, one of the most controversial is using these standards for performance evaluation of an individual, team, or unit. Consider the labor efficiency variance and assume it is one of the measures for a company’s performance evaluation of a business unit. When might or might not variance from such a standard be an appropriate measure? How would this metric’s effectiveness as a performance measure be affected by a decrease in demand or changes in production volume? Would its effectiveness be different for a service unit than a manufacturing unit? In the event that it is not effective as a performance measure, does it have a strong purpose?
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.
Of the several uses of
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