Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 11

Give two reasons why dividing production cost variances into price and efficiency variances is useful for management control.

Step 1 of 2

Cost accounting

This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Standards

Standards term is used for expected cost per unit including costs like direct materials, direct labor, overheads etc. It is calculated by diving total budgeted manufacturing cost with budgeted number of units to be produced.

Budgets

Budgets refers to a division or firms projected cost, revenue and profitability. It is used to project the cost, revenue and profitability at different activity levels. It helps companies to plans its funding, manpower and business operations. It helps to evaluate the performance also of a firm or division by comparing the budgeted amounts with actual results.