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Standard Costing in Management Accounting

Variance Report

Standard Actual Variance
Sales 12.71 11.67 1.04(F)
Direct materials 4.89 5.02 0.13(A)
Direct labor 4.45 3.50 0.95(F)
Production indirect costs 0.99 1.05 0.06(A)
Non production indirect costs 0.72 0.72 0.00
Total cost 11.05 10.29 0.76(F)
Profit 1.66 1.38 0.28(F)

Explanation of Variance

The direct material cost variance was adverse. The company’s standard cost for the materials was exceeded by the actual cost. This may have been brought about by inflation or changes in the market demand for the materials leading to high prices. The industry production costs may have increased leading to a hiking of prices. The cost of labor was favorable to the company. This may have been occasioned by less than standard level of workforce hired or lower-rate workers hired. This will have the effect of reducing the cost of labor but may be harmful to quality. The production indirect costs were adverse meaning that they went higher than expected. This may have been occasioned by government imposed taxes, changes in the structure of other departments that are directly involved in production or the administrative structure. The non production costs were exactly the same as the set target. There was no noted deviation meaning changes were not affected by the company in other departments (Horngren, 2003).

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Cost and Selling Price Reflection

The company’s cost and selling price is in tandem with the market standards. This is reflected in the fact that its standard was basically set from the trends that were observed in the overall market. The company’s total standard cost is below its actual cost. This shows high level production efficiency and a great prudent approach to accounting by the top management. Prudency means that they set higher than expected cost rates so as to have better ground for competition and contingencies such as shortage of raw materials and forceful increment of salaries from trade unions.

The company’s selling price is also in line with the industry’s average selling price. This gives the company equal chances of competition in the market like the rest of the players. The initial selling price target of 12.71 reduces to 11.67. This may have been triggered by the market prices for the cupcakes or it may have been brought about by the reduction in the costs associated with the production of a single unit of the cake which visibly reduced to a favorable difference of 0.76.

When in business it is imperative to observe the trends in market prices and costs of production. This will make the business to remain in competition and to make enough profits to enable it to grow to better heights. It is very important especially where the company is producing goods that are fast moving and whose usage is based on the selling price. The goods do not have very major differences and the customer just looks for variety. In this type of market I is very crucial to observe trends in costs and selling price.

In some instances it is not important to look into the selling prices of the goods in the market. If the company is dealing with a market that the buyers are not price sensitive, then the company focuses on improvement of quality and luxury. These are the two things that tap into this trend oriented market. Therefore, it would be imprudent for management to focus on prices and costs (Weetman, 2000).

Wage Rate

It is important for a company to set its standard rate of payment and salaries as per the government’s rate. This will reduce the advent of labor unions baying for the blood of the company. It will ensure smooth flow of operations. This may however be affected by inherent lawsuits and human resource outflow.

References

Horngren, Charles et al., 2003, Management and Cost Accounting. Oxford: Prentice Hall/Financial Times.

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Weetman, Pauline, 2000, Management Accounting. Oxford: Prentice Hall/Financial Times.

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