Analyze Standard Costing To Improve Efficiency ✓ Solved

Analyze standard costing in terms of improving efficiency

In Week 5, you will continue to build your accounting vocabulary as you study standard costs and variances. Analyze standard costing in terms of improving efficiency, analyze material and labor variances, and evaluate alternatives based on information provided by variances.

Understanding Variances: How can an organization determine if the cost of the products it produces or the services it renders are reasonable? As you consider these questions, it becomes evident that standards are needed in order to provide a comparison to the actual costs. The differences between standard costs and actual costs lead to variances.

Two important variances are the direct labor variance and the direct materials variance. For example, if a company’s standard labor cost is set and their actual labor costs exceed this, it represents an unfavorable variance and requires examination.

First, the formula to compute the total labor variance (TLV) is provided along with detailed numerical examples and explanations for both labor variance and materials variance. The analysis services as an essential tool for management to decide on future actions regarding production cost standards and overall efficiency.

Significant variances should be analyzed to determine their causes. This knowledge helps managers make better decisions in the future or confirm that efficient processes are in place. Assume you are the controller for Perfect-Contour; a variance analysis needs to be performed based on the standard cost structure provided. Evaluate variances for materials, labor hours, and overall costs compared to the standards to confirm their validity.

Paper For Above Instructions

Analyzing standard costing is essential in understanding how businesses can operate efficiently and effectively. Standard costs provide management with a benchmark against which actual costs can be measured. This analysis becomes an integral component of managerial decision-making, especially when striving to improve efficiency and reduce variances.

Understanding Variances

The concept of variances refers to the difference between expected (standard) costs and actual costs incurred in production. If a company produces goods like baseballs, establishing a standard cost for producing these items is crucial. For instance, if the standard cost to produce one baseball is determined to be $5.00 but the actual cost is $5.50, this indicates an unfavorable variance of $0.50. An analysis of such variances reveals insights into operational efficiency and financial health (Zimmerman, 2020).

Importance of Standard Costs

Standard costs are established based on historical performance, benchmarking against industry standards, and managerial forecasts for better cost control. For example, if a company sets its standard labor cost for producing a product at $15.00 per hour and actual labor costs rise to $17.00 per hour, it highlights inefficiencies needing further investigation. This type of analysis ensures that any adverse variances are scrutinized to identify underlying issues such as worker productivity or resource allocation (Bhattacharyya, 2019).

Labor Variance Analysis

Labor variance is an essential metric that provides insight into workforce efficiency. By calculating the total labor variance (TLV) using the formula TLV = (Actual Hours x Actual Rate) - (Standard Hours x Standard Rate), managers can determine if their workforce is operating within the expected standards. For instance, if 10,000 units require 4 hours at a standard rate of $12.00 per hour yet the actual hours worked amount to 42,000 hours spent at a higher rate, the resulting labor variance will reflect unfavorable performance that management needs to address (Garrison et al., 2018).

Material Variance Analysis

Similarly, material variances are calculated to evaluate the cost of materials against budgeted costs. The formula TMV = (Actual Quantity x Actual Price) - (Standard Quantity x Standard Price) allows for measuring the efficiency of material usage. For example, if the material cost was estimated at $2.50 per meter for fabric but the actual price paid by the business was $2.00 per meter for a larger quantity, this leads to favorable variances that suggest effective purchasing strategies, albeit requiring further examination if quality issues arise (Stevenson, 2021).

Evaluating the Performance of Perfect-Contour

In analyzing the performance of Perfect-Contour, Inc. and the production of massage chairs, standard costing is pivotal. The standard cost sheet indicates projected costs: metal tubing, leather, padding, and direct labor are essential to understanding variances. For example, if Perfect-Contour estimates the cost of leather at $5.00 per square meter for a projected total of 500 chairs but finds actual expenditures are significantly lower or higher, management must investigate and understand these variances to adjust future cost estimations and enhance profitability (Hansen & Mowen, 2019).

Concluding Remarks

Variance analysis, including both labor and material variances, enables organizations to identify discrepancies between expected and actual performance, guiding management in making informed decisions about cost control, resource allocation, and operational efficiency. Close monitoring of these variances and understanding their implications ultimately allows organizations to refine processes, enhance productivity, and improve their overall financial outcomes.

References

• Bhattacharyya, A. K. (2019). Financial Accounting for Management: An Analytical Perspective. Prentice Hall.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Hansen, D. R., & Mowen, M. M. (2019). Cost Management: A Strategic Emphasis. Cengage Learning.
• Zimmerman, J. (2020). Accounting for Decision Making and Control. McGraw-Hill Education.
• Stevenson, W. J. (2021). Operations Management. Cengage Learning.
• Drury, C. (2020). Management and Cost Accounting. Cengage Learning.
• Horngren, C. T., Datar, S. M., & Foster, G. (2018). Cost Accounting: A Managerial Emphasis. Pearson.
• Weber, J. (2019). Managerial Accounting: Tools for Business Decision Making. Wiley.
• Williams, J. D., Haka, S. F., & Bettner, M. S. (2018). Financial & Managerial Accounting. McGraw-Hill Education.
• Collier, P. M. (2018). Accounting for Managers: Interpreting Financial Statements for Decision Making. Wiley.