Analysis of Standard Costing System and Decision Making

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2.Part Ⅰ--Standard Costing System and Variance Analysis5 2.1.Definition5
2.2.Scenarios of Standard Costing System and Variance Analysis5 2.2.1 Scenario Ⅰ Manufacturing Companies—Auto-making Firms6 2.2.2 Scenario Ⅱ Service Industries—Banks7
2.2.3 Scenario Ⅲ Other Industries That Have not Repetitve Processes—AdvertisingFirms8 2.3.Standard Costing System on Different SIzes9
2.4.Variance Analysis9
2.4.1 Total Production Cost Variance9
2.4.2 Marterials Variances10
2.4.3 Fixed overhead Variance11
3.Part Ⅱ—Relevant and Irrelevant Costs and Incomes13
3.2.Scenario Ⅰ—Shutting Down or Keeping Open Part of the Business13 3.2.1 Relevant and Irrelevant Costs andIncomes in Scenario Ⅰ16 3.2.2 Qualitative Factors in Scenario Ⅰ16
3.3.Scenario Ⅱ—Pricing Products or Services16
3.3.1 Pricing Customized Produccts/Services17
3.3.2 Pricing Non-customized Products/Services17
3.3.3 Relevant and Irrelevant Costs andIncomes in Scenario Ⅱ18 3.3.4 Qualitative Factors in Scenario Ⅱ19
3.4.Scenario Ⅲ—Product Mix and Limiting Factor Analysis19 3.4.1 Relevant and Irrelevant Costs andIncomes in Scenario Ⅲ21 3.4.2 Qualitative Factors in Scenario Ⅲ21
3.5.Scenario Ⅳ—Make or Buy Decisions21
3.5.1 Relevant and Irrelevant Costs andIncomes in Scenario Ⅳ24 3.5.2 Qualitative Factors in Scenario Ⅳ24
I.The Learning-Curve Effect28
II.Variance Analysis for A Variable Costing System28
III.Formula for Variance Analysis29



With more and more competitive in global market, costs of companies’ products become more and more important. In this assignment, the definitions of standard costing and variance analysis are introduced. This assignment refers that whether or not standard costing system and variance analysis are appropriate to any type and size of organization, and analyzes four scenarios about decision-making. At last, some relevant and irrelevant income and costs and qualitative factors are identified in these four scenarios.

2.Part Ⅰ—Standard Costing System and Variance Analysis

2.1. Definition

Standard costing system and variance analysis usually are used in improving the control of costs. Standard costs are predetermined costs and target costs that be incurred under efficient operating conditions (Drury, 2009). Purposes of standard costing are: a forecast of costs that can be used for decision-making purposes; 4.offering a challenging target which can motivate individuals to achieve; 5.helping for setting budgets and evaluating managerial performance; 6.acting as a control device by warning managers to situations that may be ‘out of control’; 7.simplifying the task of tracing costs to products for profit measurement and inventory valuation purposes (Drury, 2008).

Variance analysis refers to find out differences between standard costs and actual costs and to analyse reasons of these differences (Atrill & McLaney, 2007). Managers analyse variances of each element of costs in each responsible centre to find out measures that can control costs more efficient.

2.2. Scenarios of Standard Costing System and Variance Analysis

The data of standard costing comes from historic costs. Standard costing is most suitable to organizations whose activities consist of a series of repetitive operations and input required to produce each unit of output can be specified (Drury, 2009). Manufacturing companies and service companies have the repetitive operations, such as auto-making companies and banks. There are, however, some industries that are not suitable for the standard costing system, since their activities have not the repetitive nature. For example, hospital whose patients differ individually and advertising firms that customize advertisements and focus on creating new things do not use the standard costing system as the...
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