Week 3

Question 1

What are the advantages of Operational and Planning Variances?

Answer 1

• Useful in volatile and changing environments (such as periods of high inflation)
• Provide up-to-date information about current levels of efficiency
• Make standard costing system more acceptable, hence have a positive motivational effect
• Emphasises the importance of the planning function in the preparation of standards and helps to identify planning deficiencies
• Will ensure that records are kept of costs of all items individually, since many do not vary in line with general inflation rates, hence improving standard costing

Question 2

What are the disadvantages of Operational and Planning Variances?

Answer 2

• Subjectivity in determining the ex-post standards i.e what is ‘realistic’
• Large amount of time is involved in continually establishing up-to-date standards and calculating additional variances
• Temptation to put as much as possible of the total variances down to planning variances
• Can then be a conflict between operating and planning staff
• The total planning variance may be broken down into detail of all types of cost, but the degree of complexity may outweigh the benefit

Question 3

Why do we use variances?

Question 4

Critically consider whether Standard Costing is a useful tool for controlling costs on this new product

Answer 4

• Advantages:
  Cost Control – set benchmarks and highlights deviations => take corrective action
  Planning – support budgeting and forecasting
  Performance Evaluation – Identify which areas (materials, labour, etc.) need improvement
• Disadvantages:
  Planning Errors – e.g price incorrectly set distorted variances
  Product Uncertainty – new products often undergo design or process changes, making standard costing less reliable
  Rigid Assumptions – assumes stable input prices and consistent usage may not hold during early production phases