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Service-Based Businesses and Standard Costing Techniques

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Standard costing and variance analysis techniques are most often associated with manufacturing businesses. You have been contracted by the owner of a small advertising agency to evaluate the use of standard costing techniques for the services provided by his firm.

Discuss whether you believe standard costing techniques can be applied to this service-based business. In your discussion, highlight the pros and cons of using such a system to track costs for an advertising business. Make a recommendation to the business owner, supported by factual information.

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Solution Summary

The pros and cons for using standard costing techniques for a service-based business are outlined.

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First, standard costing and variance analysis techniques are most often associated with manufacturing businesses; hence some managers in the service industry might think that standard costing and variance analysis are not appropriate techniques. However, the very definition of standard costs indicates that is can also be applied to service-based organization. Standard cost is the total cost that the company believes a unit of a product or the single operation of a process should cost taking into account ...

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