Management Accounting Report on Standard Costing and Variance Analysis

This report delves into the concepts of standard costing and variance analysis within the context of management accounting, using BSA manufacturing as a case study. It begins by defining standard costing as a system used to identify variances between actual and expected production costs and explains different types of standard costs. The report then highlights the importance of standard costing in increasing efficiency, optimizing resource utilization, supporting budgetary control, and aiding decision-making. Variance analysis is presented as a method to measure the difference between actual and expected results, emphasizing its role in performance management, setting roles and responsibilities, controlling expenditure, and adjusting budget estimates. The report further examines how variance analysis is used to control costs, including price and volume variances. However, it also acknowledges the limitations of these methods, such as the complexities of materiality limits. The report concludes by summarizing the roles of standard costing and variance analysis in controlling costs to maximize productivity and profitability.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
Importance of standard costing and variance analysis.................................................................3
The use of standard costing and variance analysis to control the cost.........................................5
Limitation of standard costing and variance analysis in controlling the cost..............................7
SUMMARY.....................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Standard cost refers to an accounting system which was used by the manufacturing
industry in their organization to find the variances and differences in their production and
manufacturing activities (Kaplan, and Atkinson, 2015). They are mainly used to find the
variances between the actual cost of the goods they produced and the expected cost of the
production. The cost related to the actual goods are known as the standard cost and it involves
the various activities like master budget, profit plan and manufacturer budget etc.
Normally business use various types of standard cost in their organization such as basic
standard, ideal, attainable and current standard cost to identify the variances. (Maas, Schaltegger,
and Crutzen, 2016). These are used as the background for analysis the statistical data. BSA
manufacturing company is situated in Malaysia which was started on 1995. they manufacture the
alloy aluminium wheels. They import the alloy from Germany, Italy, England etc. BSA
manufacturing use the ideal standard costing to find the best possible operating condition of the
business unit. They regulate the costing method to identify the changes in the operation condition
of the organization such as changes in technology, external environment, operating activity etc.
Attainable costing are used for the pricing of the stock valuation, cost control, performance
evaluation and for budgeting of the product. Current standard cost is used for the short period of
time. They are used to analyse the cost and performance of the current period.
Standard cost are prepared for the cost control and pricing decisions. To prepare the
standard cost for BSA manufacturing company they find per unit cost of the material, labour and
overhead of the organization. Then per unit of cost is divided to the expected amount for the per
unit material cost, expected per hour labour cost and number of hour for the direct labour and the
expected total overhead cost for the direct overhead (Resnick, and et.al., 2016).
Variance analysis is the quantitative method used for finding the difference between the
actual production or activity and the expected production and activity. It is used to control all the
activity of the BSA manufacturing company.
Variance analysis mainly done at the end of the activity and project of the organization to
find their actual position that how far or near are from the expected outcomes. It help the
businesses to find the reason behind the variances in the project or production activity.
Importance of standard costing and variance analysis
Importance of standard costing

Increase efficiency : BSA manufacturing company use the standard costing for direct
material, overhead and labour and to determine their performance in the organization
(Rosikiewicz, Bonvin, and Sanders, 2017). It helps to increase the efficiency of the production
department and workers of the organization because the actual cost of the product is compare to
the standard cost of the products which influence the employees to work better and improve their
skills to complete the production activity within the standard cost.
Optimum utilization of resources : Standard costing method also help the BSA
manufacturing company to optimum utilization of the resources. For example : standard costing
comntrol the cost of the material and evaluate the proper utilization of the material to minimize
the wastage of raw material which reduce the cost of additional purchase. The standard cost
provide the proper number of quantity of raw material, labour and overhead of the organization
(Importance of Standard Costing, 2008). It also helps to maintain the inventory level in the
warehouses, so they can manage the demand of the customer.
Budgetary control : Standard cost is used to maintain and control the budget of the BSA
manufacturing company. To control the budget of the organization they use the standard costing.
It also helps them to improve the cost by analyse the variances in the standard and actual output
and effectively control the cost of the production and manufacturing activity. To measure the
variances they use the benchmarking, key performance indicator and budgetary tools.
Decision making : It helps the organization to take the efficient and effective decision.
There are various expenses which are related to the manufacturing activity. Standard cost
evaluate the different alternatives like using the different methods to minimize the expenses and
take the right decision for BSA manufacturing company for example purchasing of material from
the different suppliers, setting the price of the product by using different pricing strategies like
penetration pricing, skimming pricing etc. (Stouthuysen, and Roodhooft, 2018).
Importance of variance analysis
Performance management : Variance analysis is used to evaluate the performance of
the organization buy comparing the actual and standard cost and find the reason behind the
variances or differences. BSA manufacturing use the variance analysis tool to measure the
performance of the employees and the organization both in monetary and non-monetary term.
Favourable variances indicate the good performance of the management and the adverse variance
indicates the poor performance of the management and the employees. By measuring the

performance of each department and job role they concentrate on the variance and provide the
effective measures to control the cost.
Setting role and responsibility : variance analysis is important for the organization to
set the roles and responsibility. BSA manufacturing use the variance analysis technique to set the
roles and responsibility of the managers, so they can evaluate their performance in the
organization and to control their activity (Advantages of Variance Analyses, 2015.). By setting
the responsibility and role of each employee it is easy to measure their performance in their job
role and calculate the variance in the expected outcome and actual outcome.
Controlling expenditure : The role of variance analysis in the organization to control
the expenditure of the manufacturing department. In the adverse situation BSA manufacturing
company take the appropriate control action via the variance analysis to control the expenditure
of the organization (Banerjee, 2019). For example Variance analysis analyses the performance
and find the area which increases the cost. By evaluating the area they control the cost by
minimizing the expenditure.
Indicate the departure : Variance analysis is important to indicate the departure from
the expected and actual production or output of the organization. From departure in the activities'
management of the BSA manufacturing is able to identify the reason behind the departure by
investigate the whole process. By analysing the relevant fact they are able to analyse the
variances and adverse departure.
Adjust budget estimates : The variance analysis is also important for the adjustment of
the future budget estimates. BSA manufacturing company use the variance analysis to adjust and
correct the budget estimate according to the changes in the organization. By estimating the
correct budget they help the organization to gather the useful resources from the organization and
prepare a proper budget plan (Jones, and Godday, 2015). A budget plan help the company to
prepare for the expected expenses and spend according to the budget which ultimately force
them to control the cost.
The role of standard costing and variance analysis is to control the cost of the organization to
maximize the productivity and profitability of the organization to achieve the goal and objective.
The use of standard costing and variance analysis to control the cost
Use of variance analysis to control the cost

Variance analysis is the part of standard cost to measure the differences. Variance
analysis is used to compare the actual cost with the standard cost of the organization. Variance
analysis work as a tool for analysis the financial and operational data to identify the reason
behind the variances and rectify or correct the differences via the proper management. The
common cause to calculate the variances in the organization are:
1. To identify the difference between the actual and standard cost.
2. To investigate the fact behind the differences in the cost.
3. To report the management department.
4. And to take the correct action to minimize the differences in the actual and standard cost
and help the management top take the efficient decision from the different alternatives.
To control the cost of the BSA manufacturing company first they find the differences between
the actual and standard cost by subtracting the standard cost from the actual cost. If they found
favourable result in the comparison it means that the performance of the organization is good nut
if they found the adverse result it means that they have to control the performance for minimize
the cost of the organization. They evaluate the different area to minimize the cost like the labour
rate, purchase price, material yield, variable overhead, selling price etc. so they can find the area
where they need to control the activity to minimize the cost. To control the cost BSA
manufacturing divide the analysis in two part price variance and volume variance.
Price variance : The price variance is used to control the cost by finding the difference between
the actual price and the standard price of the manufacturing activities (Whiting, and et.al., 2015).
By evaluating the variances in the price they are able to use the different pricing strategy like
penetration, cost leadership etc. and evaluate their effects on the organization performance.
Volume variance : These is used to find the reason behind the changes in the volume of services
and goods of the organization. They analyse the reason behind the variances and take the correct
measure to control the cost of the organization. They evaluate the each and every activity like the
raw material cost, labour, overhead and the working hours of the employees to find the area
where they need rectification for the effective and efficient running of the business by controlling
the activities. They analyse each alternative through their pros and cons and select the right
alternative which give the expected output.
Than they report to the management about the reason of the variances and the different
techniques to minimizes the variances in the organization. The top management take the final

decision to implement the right measure for the BSA manufacturing company. For example for
manufacturing company compare the performance with their competitor and their pricing
strategy to find the reason behind the adverse variances and take the effective measure like using
better pricing strategy to reduce the cost.
Variance analyse used to control the cost also by evaluating the performance of the
managers. The comparison of cost provide the detailed information about the data of the
manager performance. By evaluating the performance they find the area of improvement and
train their employees to effectively manage the activity, so they can control the cost of the
manufacturing activity and accomplish the goal within the BSA manufacturing company
estimated budget. To evaluate the performance they use the various tools like the key
performance indicator which evaluate the monetary and non-monetary performance of the
organization and its employees. Standard costing is the process of controlling the cost of the
organization.
Limitation of standard costing and variance analysis in controlling the cost
Standard costing and variance analysis are the important tools to estimate the budget and
improve the performance by the variance rectification but at the same time they also have some
disadvantages in usage of variance analysis to control the cost. The limitation of standard costing
and variance analysis are as follows:
Variances controversial materiality limits : To determine the materiality of the variance
analysis may become controversial because the management has to undertake the estimates of
the cost at different activities with the different people which create problems in communication.
The variance controversial material limit increases the time also because of the delay in receiving
the information. It also need the individual judgement in deciding the material cost and limits.
BSA manufacturing company manufacture the alloy steel in their organization. The variance
controversial affect the productivity of the BSA manufacturing company.
Reporting delay : Variance analysis is based on the expected budget and the actual budget
and it taken as the part of budgeting. The workers or employees of the organization not always
report the all aspect to find the reason behind the variances which provide the limited
information to the management. The management focus on the limited subject area or activities
and ignore the other aspect which unnecessarily increases the cost of the BSA manufacturing
company so the measurement of variance analysis is not always beneficial for the company

(Goffin, 2018). The hindrance of the real fact by the employees in estimating the budget or cost
of the product and services of BSA manufacturing company increases their variance or
differences and provide wrong assumption to the management team. It also reduced the
efficiency and effectiveness of the organization and its employees. Delay in reporting also
increases the duration for taking the decision for the BSA manufacturing company which create
the additional cost in manufacturing activities.
Behavioural issues : The negative perception regarding the standard costing and variance
analysis may encourage the employees for the immoral behaviour and sub optimal behaviour
among the employees like try to incorporate budget slacks. It can be managed by the
involvement of employees in the budget setting process but the same time the different views of
the employees also increases the conflict in the organization and increases the time in the
decision making process. It also affect the other production activity because the involvement of
employees in budgeting process affect their daily scheduled work and increases the unnecessary
and irrelevant cost of the BSA manufacturing company. So it can be find that with the
advantages of the standard costing and variance analysis it also have some disadvantages (Nas,
2016).
Assigning responsibility : Assigning responsibility is the major function of the standard
costing and variance analysis. Variance could be arise from the number of factors such as
unrealistic standard, operational causes etc. The ineffective planning process may create the high
variances in the BSA manufacturing company which increases the ineffective cost management
(Boardman, and et.al., 2017). Sometime assigning responsibility of operational variances to
individual, function or department may be difficult which create barriers in controlling the cost
of the organization. It also argued that variance analysis does not provide the proper basis for the
cost management and analysis the issues related to the cost of the organization.
Non standardized product : Standard costing is mostly use for the mass manufacturing
and production environment because it provides the benchmark for the comparison of the
performance but for the small and non-standardized product it is unable to provide suitable
benchmark for the comparison of the performance (Muennig, and Bounthavong, 2016). For the
small benches of customized product they need the new benchmark for the customized product
which increases their time and cost of the organization. For the non-standardized product they
are unable to control the cost because of the improper variance analysis. The improper

benchmark provide the wrong variances in the actual and standard cost which create mess in the
analysis and does provide the proper measurement to overcome the variances and control the
cost of the BSA manufacturing company.
The standard cost and variance analysis are used to calculate the difference between the
standard cost and actual cost of the organization for the evaluation of the performance and
estimate the budget of different activities like the material, labour and wages payment etc. so it is
necessary to evaluate the variances to control the cost but sometime standard cost and variance
analysis is unable to measuring the cost because of the many reason like the lack of interest of
the workers in organization activity, improper planning, inefficient resource etc. which create
barriers in evaluation of the variances and effectively controlling the cost of the organization.
SUMMARY
Standard cost are used to analyse the performance of the organization by analysis the actual cost
with the standard cost. To analyse the cost of the organization common technique variance
analysis are used by the firm. In these report the different types of standard cost are described
and also focusses on the standard cost and variance analysis.
The report also explain the various importance of the standard cost and variance analysis
in the organization business by measuring the performance and analysis the different ways to
minimize the variances. Standard cost increases the efficiency of the organization, budgetary
control and also help the top management in decision-making process. Standard cost id used to
control the cost by estimating the variances in the organization performance and regulate their
performance to direct them in pro[per direction.
The report also summarizes the uses of standard cost and variance analysis in the
business. By measuring the variances in the organization and find the different ways to overcome
the variances it helps the business unit to control the cost of the organization by evaluating their
variances such as variance in budget, cost control, performance and monitor each and every
activity of the cost analysis.
It also focuses on the various limitation of the standard cost and variances analysis in
controlling the cost of the organization. The non-standardized products, delay in decision-
making and behavioural issues in the company create the barriers in controlling the cost in
manufacturing and production company.

REFERENCES
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Business Organizations: An Empirical Study of Delta State. NG-Journal of Social
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Online
Importance of Standard Costing. 2008. [Online]. Available through :
<http://www.svtuition.org/2009/10/importance-of-standard-costing.html>.
Advantages of Variance Analyses. 2015. [Online]. Available through :
<http://formulaexamples.blogspot.com/2015/12/advantages-of-variance-analyses.html>.