MA – Nov 2024 – L2 – Q4b – Standard Costing and Variance Investigation

Explanation of the use of standard costing in decision-making and key factors to consider before investigating variances.

Question

Standard costing has been employed by organizations as a control technique to analyze the deviation of results from those that are expected.

Required:

i) Explain TWO ways managers have effectively deployed standard costing as a tool in decision-making analysis.

ii) Explain THREE key factors a manager should consider before deciding to institute an investigation into reported variances.

Answer

Performance Benchmarking: Managers use standard costing to compare actual costs with predetermined standards, identifying deviations and areas for performance improvement.
Cost Control and Budgeting: Standard costs help in setting cost control mechanisms by highlighting cost variances and guiding corrective actions for efficiency.

Cost and Benefit of Investigation: The cost of investigating the variance should be weighed against the potential benefits derived from addressing it.
Size of the Variance: Only significant deviations should be investigated under the management-by-exception principle.
Trend Analysis: Consistent unfavorable variances may indicate systematic problems, whereas one-time variances might not warrant investigation.
Extent of Controllability: Some variances may be due to uncontrollable external factors, making investigations unnecessary.
Nature of the Variance: Managers should determine whether the variance is favorable or adverse before deciding on an investigation.