Decision-making using Standard Costing (Cambridge International A-Level Accounting)

Spec point — how to make business decisions and recommendations using supporting data the significance of non-financial factors

Decision-making using standard costing

How can standard costing help with decision-making?

• Standard costing can help with the following decision-making scenarios

Material cost

• Should the firm change the supplier to negotiate a better material price?
• Is the quality of the material as expected?
• The firm could consider methods of production to reduce material wastage
• Consider the delivery charges of purchasing of material

Labour cost

• The firm can assess the standard charge per hour to see if it needs adjusting
• Due to production demands, should the business increase or decrease the number of employees
• To increase efficiency, does the firm invest in more staff training?

Sales

• The firm will consider if the selling price needs adjusting to meet the set standards
• Do sales staff need more of an incentive to improve the sales volume?
• How can the firm be more competitive with their pricing strategies?

What are interrelationships?

• Variances do not have isolated causes, as occasionally the cause of one variance will lead to an adverse or favourable impact on another

  • For example,poor quality material may well be cheaper leading to a favourable material price variance
  • Poor quality material can also lead to more hours needed to make the product, leading to an adverse labour efficiency variance

Exam Hint When discussing the causes of variances, it is important to show the interrelationships between the variances.