4. What are some advantages of using standard costs? What are some disadvantages

Question

4. What are some advantages of using standard costs? What are some disadvantages? When might a given company have a substantial favorable materials price variance and a substantial unfavorable materials usage variance? 5. What is the usual cause of a favorable or unfavorable labor rate variance? Between the labor rate variance and the labor efficiency variance, which is more likely to be under the control of management? Explain. 6. 7. How does an accountant typically dispose of variances from standard?

Explanation / Answer

4. Advantage

1. The use of standard costs is a key element in a management by exception approach. If costs remain within the standards, Managers can focus on other issues. When costs fall significantly outside the standards, managers are alerted that there may be problems requiring attention. This approach helps managers focus on important issues.

2. Standards that are viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their own performance.

3. Standard costs can greatly simplify bookkeeping. Instead of recording actual co0sts for each job, the standard costs for materials, labor, and overhead can be charged to jobs.

Disadvantage

The system of standard costing is expensive to install

Time Consuming

Hard to Understand

Effectiveness depends on Environment

It is Subjective As we have already seen, there are several types of standards that an organization can adopt (basic, ideal, attainable and cement).

5. When company gets material at less than standard price then company given substantial favorable material price variance.

When company used qty of material more than standard qty then company given substantial Unfavorable quantity variance.

6. When company hired labour at less than standard price then its comes to labour favorable variance and if company hired labour at more than standard price then its comes to labour Unfavorable variance.

Labour rate variances comes due to labour hiring rates which is depends upon market condition but labour efficiency variance is under the control of management, because utilisation of labour hours depends upon factory environment and policy of the company, if company proper utilise the labour hours then efficiency variance will be favorable and if not properly utilised then unfavorable labour efficiency variance will come.

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