Stocks can be valued at standard cost. That would mean that you would not have to deal with actual cost whether using FIFO, LIFO or the weighted average basis. For the financial accounts at the year-end, the organization should check that standard costs approximate to the actual costs.
Ø By comparing standard costs to the actual costs, the business has a way of judging performance. Difference between actual and standard costs is known as variances.
Ø Record-keeping during the year is greatly simplified. As units pass from one department to another, they are recorded at their standard costs. The business does not have to keep calculating actual costs.
Instead of tracing the actual costs to production, the standard costs are used. Of course, actual costs have to be accounted for at some time, but using standard costs has the following advantages:
Ø Pre-determined costs that should be incurred under normal efficient operating conditions.
Principles of Variance analysis
Variances are calculated by comparing actual costs (or income) with the costs (or income) that there would have been had everything gone according to plan.
• When something goes worse than planned, there will be an adverse variance.
Variances therefore indicate where there are discrepancies between actual and planned performance. Such discrepancies may be fruitful places for management to look when trying to improve performance or when trying to pinpoint why poor performance has occurred.
Cost = $5
Standard material cost per unit= $50
Cost = $72000
Units made= 1000
When the resources used for a month are measured, the following is discovered: