Question

Explain why Standard Costs are often used in variance analysis.

Answer 1

Standard costs are often used in variance analysis since-

1)Standard costs are pre determined costs representing what the costs should be,at the level of efficient conditions of production and operation.

2) Standard costs are set up to exercise cost control and judge performance by setting up targets.

3)It provide benchmarks against which the actual performance and costs are compared ,variances are calculated and reasons for the variances ascertained.

3)Standard costs are of immense help since they are long term estimates of the same activity and represent managements view of the level of efficiency that should prevail. Similarly for determination of standards , information on past budgeted and actual costs is useful.