Q – Read the discussion attached and prepare a Reply to this discussion post with comments that further and advance the discussion topic.
Evaluating the Importance of Variances from Standard Costs in Managerial Accounting
Evaluating variances from standard costs is a critical step in managerial accounting. It helps
managers identify areas where costs are higher or lower than expected, investigate the causes of
variances, and take corrective action. By understanding variances, managers can better control
costs, improve efficiency, and increase profitability.
What are Variances from Standard Costs?
Standard costs are predetermined costs for inputs and outputs. Variances from standard costs
occur when actual costs differ from standard costs. Variances can be positive or negative. A positive
variance indicates that actual costs were higher than standard costs, while a negative variance
indicates that actual costs were lower than standard costs.
Types of Variances from Standard Costs
There are two main types of variances from standard costs: price variances and quantity variances.
Price variances: Price variances occur when the actual price of inputs or outputs differs from the
standard price.
Quantity variances: Quantity variances occur when the actual quantity of inputs or outputs differs
from the standard quantity.
Causes of Variances from Standard Costs
Price variances can be caused by factors such as changes in the prices of raw materials, energy, or
labor; changes in exchange rates; or unexpected changes in demand. Quantity variances can be
caused by factors such as changes in production efficiency, scrap or waste, or the product mix.
How to Analyze Variances from Standard Costs
To analyze variances from standard costs, managers typically use a variance analysis report. This
report shows the standard costs, actual costs, and variances for each input or output. Managers can
use this information to identify areas where costs are higher or lower than expected.
How to Address Variances from Standard Costs
Once managers have identified variances from standard costs, they can investigate the causes of the
variances and take corrective action, if necessary. For example, if a price variance is due to an
increase in the price of a raw material, the manager may need to negotiate a better price with the
supplier or find a new supplier. If a quantity variance is due to scrap or waste, the manager may
need to implement quality control measures or train employees on how to reduce waste.
Benefits of Evaluating Variances from Standard Costs
There are many benefits to evaluating variances from standard costs, including:
Improved cost control: By understanding variances, managers can better control costs and identify
areas where savings can be achieved.
Improved efficiency: By investigating the causes of variances, managers can identify ways to improve
production efficiency and reduce waste.
Increased profitability: By controlling costs and improving efficiency, managers can increase the
profitability of their businesses.
Conclusion
Evaluating variances from standard costs is an essential part of managerial accounting. By
understanding and addressing variances, managers can improve the efficiency and profitability of
their businesses.
Here are the references for the information in my response on evaluating variances from standard
costs in managerial accounting in APA style:
* Horngren, C. T., Datar, S. M., & Rajan, M. V. (2018). Cost accounting: A managerial emphasis (16th
ed.). Pearson.
* Atrill, P., McLaney, E., & Harrison, A. (2012). Management accounting: For decision makers (7th ed.).
Pearson.
* Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2018). Cost management: Accounting & control (10th
ed.). Cengage Learning.
* Institute of Management Accountants (IMA). (2018). Statement on standards for management
accounting (SSMA) No. 5B: Standard costs
* American Institute of Certified Public Accountants (AICPA). (2017). Statement on auditing standards
(SAS) No. 122: The auditor’s consideration of the internal control over financial reporting and the
assessment of control risk
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