Standard Costs Are Said to Be Useful in Performance Evaluation

question 29

Essay

Standard costs are said to be useful in performance evaluation.Assume that the standard direct materials cost per unit of finished product is $6 (three pounds at $2 per pound).
Required:
A.Explain how such a standard can be used to evaluate performance.
A.The standard provides a measure of how much material should be used for a unit of product and how much each pound of raw material should cost.This standard serves as a basis for evaluating performance by allowing a comparison to be made of standard cost/usage against actual cost/usage.
B.The degree of controllability is important because not all factors are subject to the same amount of control.For example,the market for the raw material may be a seller's market in which case management would have very little control over the material price variance.On the other hand,management generally has more control over the usage of materials because of the ability to influence the amount of scrap and rejected units produced.In short,a manager should be held accountable only for those items under his/her control.
B.Why is the degree of controllability important when utilizing standard costs to evaluate performance?

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Definitions:

Market Quantity

The total amount of goods or services available for purchase within a specific market.

Consumer Surplus

The divergence in total potential expenditure consumers are ready to make on a good or service against actual expenses incurred.

Welfare Economics

A branch of economics that focuses on the optimal allocation of resources and goods and aims to evaluate social welfare.

Equilibrium Price

The cost point where the amount of a product or service sought by consumers matches the amount available from producers.