Question

a) How do standard costs are developed.

b) How do we calculate and interpret variances for direct materials.

c) What are the advantages and disadvantages of decentralization.

Answer 1

(a) Standard cost is usually identified for the manufacturing concerns. The total standard cost is found by adding the standard material cost, standard labor cost and standard overhead cost. The above cpst should be found per unit . Then thses costs are added up to find total standard cost per unit. The format is known as standard cost card. The standard cost is determined to have an expected idea as to what standard cost will be required.

(b) Variances are differences in actual and standard costs set up. The two material variances are price variance and quantity variance. Price variance is difference in the actual aterial cost and standard material cost due to chamge in price. Material price variance = actual quantity (standard price per unit - actual price per unit)

The quantity variance is due to the difference in ler unit usage of direct material between the standard usage and actual. Material quantity variance = Standard price (Standard quantity of material for actual output - actual quantity of material for actual output).

interpretation : if the standard cost is higher than actual cost than the variance is took favourable and vice a versa

(c) Advantages of decentralization

1 Quick decision making at each level of organization

2 promotes motivation at lower level of organization

3 Reduces the burden of top level organization

4 better control and suervision.

Disadvantage of decentralization

1 Lack of coordination in the entire organization

2 Require more qualified personnel to be able to hold high authorities.

3 Conflict of intrest between various divisions.