Q – Please read the discussion below and prepare a Reply to this discussion post with
comments that further and advance the discussion topic.
Please provide the references you used.
Ensure zero plagiarism.
Word limit: 200 words
Discussion
Evaluating Variance from Standard Costs
Evaluating variances from standard costs is critical for any business looking to enhance performance
and make informed decisions. By comparing actual costs and revenues with predetermined
standards, companies can identify inefficiencies and take corrective action to rectify them. This
process is essential to managerial accounting, allowing managers to investigate the reasons behind
variances and make better decisions for future operations. With the insights gained from evaluating
variances from standard costs, businesses can improve efficiency, reduce costs, and ensure longterm success. Therefore, companies must adopt and use this practice to their advantage (Hansen &
Mowen, 2015).
Benefits of Evaluating Variances from Standard Costs
Performance measurement uses standard costs as benchmarks representing the expected costs
under normal circumstances. This allows businesses to compare actual expenses against standards
to assess operational efficiency and performance. Cost control, on the other hand, involves using
variance analysis to identify deviations from planned costs. Businesses can take corrective actions to
control costs effectively by pinpointing the reasons behind variances. Moreover, managers use the
information from variance analysis to make informed decisions about pricing, budgeting, and resource
allocation. Accurate variance information ensures that decisions are based on actual performance
data, which leads to better strategic planning.
Why do we have Variances, and how can we address them?
Volume variances arise due to changes in production quantity; if the quantity of inputs used to
produce the output differs from the expected amount, the actual cost of production will vary from the
standard price. Moreover, Efficiency variances result from inefficiencies in production processes,
which can be addressed by optimizing processes, providing employee training, and improving
resource allocation (Hansen & Mowen, 2018). Similarly, Price variances occur due to fluctuations in
input prices. To address them, businesses can negotiate better supplier contracts or seek alternative
suppliers to reduce input costs (Atkinson, Kaplan, Matsumura, & Young, 2012).
Additionally, Spending variances are caused by overspending on inputs and can be addressed by
implementing stricter budget controls and adopting cost-effective procurement strategies (Collier,
2018). Finally, errors in recording or calculating costs can also lead to variances from standard costs.
They can be addressed by accurately recording costs and implementing an additional step to review
them before submitting.
More measures to address variances
– Regularly tracking variances is crucial for businesses to detect issues early and take timely
corrective actions. Managers can proactively address potential problems by continuously monitoring
and analyzing variances.
– Identifying the root causes of variances is essential in addressing fundamental issues that cause
deviations. Root cause analysis helps managers take corrective actions that prevent future
occurrences of the same problem.
References
Atkinson, A. A., Kaplan, R. S., Matsumura, E. M., & Young, S. M. (2012). Management Accounting:
Information for Decision-Making and Strategy Execution (6th ed.). Pearson.
Collier, P. M. (2018). Management Accounting in the Digital Economy. Routledge.
Hansen, D. R., & Mowen, M. M. (2018). Cost Management: Accounting and Control (7th ed.).
Cengage Learning.
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