Decision-making using Standard Costing (Cambridge (CIE) A Level Accounting): Revision Note

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