Question

7. Why should a standard cost that is higher than an actual cost be of concern to management?

Answer 1

Standard costs are the budgeted costs that are set for a particular process or product based on the estimates. These are the costs that are kept as base to calculate actual costs.

Although, if actual costs are less than the standard costs, it will be favourable to the company as it would mean that expenses actually incurred are less than the expected and company is earning more profits. But this is also an issue of concern for the management, mostly in cases where standard costs are way higher than the actual costs. Setting high standards would reflect the inability of the management to efficient analyze and predict the future costs. This would also bring other standards and goals set by the management under question of accuracy. Also, overstated standards would misguide the middle and lower levels of management as they consider standards as a base and set mark for their performance. High standards would enlarge their scope of spending more and be less considerate about the actual costs.

Thus, setting standard costs should be done strategically and after identifying and considering all the aspects carefully otherwise it may seem favourable but would reflect the inefficiency of the management decisions in real.