Many companies have discovered the importance of cost control as a means of survival in fiercely competitive markets in the early 2000. By implementing an organized, companywide process for controlling costs, a firm can reverse its sinking earnings trend and recover its market position.
Standard costs are established and revised each period during the budgeting process. Standard costs are continually reviewed and periodically revised if significant changes occur in production methods or in the prices paid for material, labor, and overhead. The level of production output plays an important role in determining cost standards. For instance, grossly underutilized production facilities often experience varying degrees of cost inefficiency. Conversely, the stress and demands imposed on production facilities operating at full capacity can cause cost overruns. Thus, standards should correspond to what costs should be under normal operating conditions for a particular company. Establishing realistic cost standards requires input from many different sources- often including people from outside of the business organization.
Materials variances may be caused by the quality and price of materials purchased and by the efficiency with which these materials are used. Labor variances stem from workers' productivity, pay scales of workers placed on the job, and the quality of the materials with which they work. Overhead variances result both from actual spending and from differences between actual and normal levels of production.
Bill Schmidt, Sun Air's accountant, expressed his disappointment about deviations from the production volume and costs from the set of standards in the molding department. He noticed the apparent variances of the actual costs of production of 430 hulls against the standard costs of production for the normal planned volume of 450 hulls while reviewing the most recent month's production results. He predicted that there will be unfavorable variances again so he...