Asked by Jeremy Dyzenhaus on May 27, 2024
Verified
Usefulness of standard costs in controlling costs
Standard costs are said to be useful in controlling costs. Assume that the standard cost for raw materials per unit of finished product is $6.00 based on 3 kg at $2.00 per kg.
i. Explain how such a standard can be used to evaluate performance.
ii. Why is the degree of controllability important in utilising standard costs to evaluate performance?
Standard Costs
Predetermined costs for materials, labor, and overhead that are used as benchmarks for measuring performance.
Controlling Costs
The process of planning, monitoring, and managing expenses to operate within a budget.
Degree Of Controllability
The extent to which the cost or performance outcome of a process or operation can be influenced or managed by the responsible party.
- Recognize the elements contributing to disparities in labor and material expenses and the management reactions to such discrepancies.
- Acquire knowledge on how standard cost systems are applied in production management and cost reduction.
Verified Answer
NA
Nurul ArdianMay 31, 2024
Final Answer :
i. The standard cost provides a measure of how much material should be used for a unit of product and how much each kilogram of raw material should cost. This standard provides a basis for evaluating performance by allowing a benchmark to be established based on the actual output of finished product for the time period. If an output of 100 units is assumed, then 300 kilograms should have been used. Furthermore, these materials should have been purchased for $2 per kilo.
ii. The degree of controllability is important because not all factors are subject to the same degree of control. For example, the market for the raw material may be extremely competitive, in which case both buyers and sellers in that market are price takers. Therefore, management would have very little control over the material's price variance. On the other hand, management generally has more control over the usage of materials due to the ability to influence the amount of scrap, rejected units etc. that are produced.
ii. The degree of controllability is important because not all factors are subject to the same degree of control. For example, the market for the raw material may be extremely competitive, in which case both buyers and sellers in that market are price takers. Therefore, management would have very little control over the material's price variance. On the other hand, management generally has more control over the usage of materials due to the ability to influence the amount of scrap, rejected units etc. that are produced.
Learning Objectives
- Recognize the elements contributing to disparities in labor and material expenses and the management reactions to such discrepancies.
- Acquire knowledge on how standard cost systems are applied in production management and cost reduction.