Discuss how standard costing is used in management planning Essay
Since the company’s main objective is to maximize profit, a planning and control system is essential. Firstly, a strategy that best satisfies the objectives of a company has to be selected. Secondly, the decision has to be implemented into a planning process. Therefore, a budget that relates to the entire activity of a company and to forecasted future revenues and expenditures has to be prepared. Standard costing can assist In budget setting and it supports cost control by setting standards.
Establishing a standard cost for each unit produced enables a detailed analysis of budgeted and actual costs so that costs can be controlled more effectively. Once a budget Is set, It becomes the target by which performance Is evaluated and assured. A company must remember that targets must be realistic and achievable to motivate people, otherwise the budget will become a source of denomination. After finishing the budget the input of a company (4 M’s = Manpower, Machines, Money and Material) is going to be transformed to output units during the production process.
The production is followed by the control process: actual costs incurred are compared with standards costs to reveal variances, to monitor performance and to provide feedback. A standard cost
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It points out potential problem areas for closer Investigations, for example adverse (actual costs>budgeted costs) and favorable (actual costs The entire process is known as “system-feedback-loop”, and it indicates that planning and control process is dynamic and that a standard cost system can support the management decision making process by discovering better ways of adhering to standards, of altering standards, and of achieving objectives.