This post addresses costs, variances, & a balanced scorecard
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(a) What are some of the advantages and disadvantages of standard costs? How do managers determine what the standard cost should be? Describe the effect of inaccurate standard costs on financial reporting. How often should we revise standard costs?
(b)When should variances be investigated? Who should be responsible for correcting a negative variance? Why? What are some factors that can lead to variances? How can variances be corrected?
(c) What is the balanced scorecard? What are some of the advantages and disadvantages of the balanced scorecard as a management performance measurement tool? How does the balanced scorecard compare to other management performance measurement tools? Which user groups might benefit the most from the use of a balanced scorecard? Why?
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The solution explains each of the questions presented in full, involving costs, variances, and the balanced scorecard.
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(a) Advantages of standard costs include that it provides a predetermined structure for costs. This helps in a continuous form of monitoring and allows management to focus on other issues, whereas they're not tied up in continually analyzing costs. If and when a cost deviates from the standard cost system, it is immediately apparent and management can then deal with the deviation. Standard costs simplify the financial reporting process. The main disadvantage is that standard cost variances can take time to receive by management, and any variances present may go undetected until the time that the next variance report is issued. This can end up costing the company more money than anticipated due to the unknown variance that exists. Another disadvantage is also a limitation -- it assumes that conditions are constant, and in reality, they're not. Managers determine what standard costs should be based on historical trend. They make use of the standard cost data from the previous period, and they also rely on industry standards to determine standard costs. Inaccurate standard costs will either understate or overstate budgets and financial ...
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