ACCA PM Syllabus D. Budgeting And Control - Using Standard Costs - Notes ^{1 / 4}

Variance analysis may not be appropriate in modern manufacturing companies because:

1. Standard product costs apply to manufacturing environments in which quantities of an identical product are output from the production process. 

   They are not suitable for manufacturing environments where products are nonstandard or are customised to customer specifications.

2. It is doubtful whether standard costing is of much value for performance setting and control in automated manufacturing environments. 

   In practice, where manufacturing systems are highly automated, the rates of production output and materials consumption, are controlled by the machinery rather than the workforce.

3. Variances are the difference between actual performance and standard, measured in cost terms. 

   The significance of variances for management control purposes depends on the type of standard cost used. 

   For example, adverse variances with an ideal standard have a different meaning from adverse variances calculated with a current standard.

4. Standard costing and adherence to a preset standard is inconsistent with the concept of continuous improvement, which is applied within TQM and JIT environments.

5. Variance analysis is often carried out on an aggregate basis (total material usage variance, total labour efficiency variance and so on) but in a complex and constantly changing business environment more detailed information is required for effective management control.

6. Shorter product life cycles in the modern business environment mean that standard costs will need to be reviewed and updated frequently.