Chapter 10 is about standard costs and also the variances and a manager can use this to understand the function of standard costs in organizational management. By determining each product’s standard cost the manager of a company can establish the standard cost of materials directly, the standard cost of the labor and the standard cost of the manufacturer as well (Maduekwe, & Kamala, 2016). With the help of standard cost, managers can be able to calculate the performance of the management, the performance of the workers or the employees and can set the perfect price of the products.
Flexible budgeting is more informative for managers
The plans that business managers make for better productivity in the future are known as budgeting. A static budget is specifically defined as a starting budget which is a compulsory tool for planning. Now if a secondary tool called the flexible budget is created to will allow the business to calculate its productivity during the period of the static budget. If there are any different or specifical variances in case of flexible budgeting then it will give critical data regarding a business that is small with respect to several elements of performance which will include the overhead profit as well as the total cost.
The budget that a business has at the beginning of the business is known as the static budget. On the other hand, the preparation of a flexible budget is done when the period of the static budget ends. A static budget basically depends on the expected figures for production. On the other hand, the flexible budget provides the business with what the initial budget or the static budget must have actually been by the use of real figures of output from the period of the budget.
For example, if the production of 1100 units was covered by the static budget and only 700 units were formed then the number of units taken into consideration by the flexible budget would be just 700 (Alkaraan, 2018). So, the flexible budget helps in showing the budgeted products from the initial budget or static budget and the actual outcomes as well. The budgeted products include sales that are expected and cost sales.
Gaining insights into the causes of variance
A measure that is used periodically by the governments or the corporations or even by the individuals for quantifying the differences that occur between the figures that are budgeted and the figures that are actual for a certain category of accounting is known as a variance (Kwon, Mondal, Jang, Bilge, & Dumitraş, 2015, October). In order to gain insight into the reasons why variances occur, the individual at first needs to understand the factors that cause the variances. At first, the manager needs to gain knowledge about the factors that are controllable and the factors that are uncontrollable. For example, the manager needs to know that a budget that is planned poorly adds up to the factor that is controllable (Forrestal, Harty, Carolan, Lanigan, Watson, Laughlin, & Richards, 2016). The manager also needs to know that natural disasters add up to the factors that are uncontrollable and that cause variance. After the factors are known the manager can then determine the three basic causes of the variance which are errors, expectations that are not met and change in conditions of the business.
Problem
If a problem arises regarding the line of production of a company’s product then the manager can solve the issue by the use of the incentives or the factors that causes the variance. For example, if the manager has to find the variance in the price of a material for a year the manager must at first need some research. The manager would have to evaluate the actually purchased quantity, the actually used quantity, the standards amount and the actual paid price. Suppose the values for these four are 200.0 units, 120.0 units, 100.0 units and $8.0 per unit respectively.
As the actual paid price is $8.0 per unit and the standard amount is $10.0 per unit, hence the variance in price would have to be favorable. So, the formula for calculating the variance can be as given below.
Variance = actual purchased quantity (standard amount – actually used quantity)
= $2.0 ($10.0 - $12.0) = $400.0.
Hence the manager would be able to calculate the variance in this way which in this case is $400.0 and the factor is favorable.
References
Alkaraan, F. (2018). Public financial management reform: an ongoing journey towards good governance. Journal of Financial Reporting and Accounting, 16(4), 585-609.
Forrestal, P. J., Harty, M., Carolan, R., Lanigan, G. J., Watson, C. J., Laughlin, R. J., ... & Richards, K. G. (2016). Ammonia emissions from urea, stabilized urea and calcium ammonium nitrate: insights into loss abatement in temperate grassland. Soil use and Management, 32, 92-100.
Kwon, B. J., Mondal, J., Jang, J., Bilge, L., &Dumitraş, T. (2015, October). The dropper effect: Insights into malware distribution with downloader graph analytics. In Proceedings of the 22nd ACM SIGSAC Conference on Computer and Communications Security (pp. 1118-1129). ACM.
Maduekwe, C. C., & Kamala, P. (2016). The use of budgets by small and medium enterprises in Cape Metropolis, South Africa. Problems and Perspectives in Management, 14(1), 183-191.
Šatanová, A., Závadský, J., Sedliačiková, M., Potkány, M., Závadská, Z., &Holíková, M. (2015). How Slovak small and medium manufacturing enterprises maintain quality costs: an empirical study and proposal for a suitable model. Total quality management & business excellence, 26(11-12), 1146-1160
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