Question

Many of the businesses we frequent as consumers, from dentists to fast food restaurants, charge us for their goods and services without first determining how much those goods and services actually cost to provide them.

- Since retail price is determined by cost, businesses which charge in advance must manage the dual risks of possibly overcharging their customers and perhaps losing them because their prices are not competitive, or undercharging their customers and operating on profit margins too small to sustain operations long-term?

-How does the concept of Standard Costs help managers successfully navigate these risks?

Answer 1

Standard costing helps in these ways to the manager:

• Improvement in cost control.
• More useful information for managerial planning and decision making.
• More reasonable and easier inventory measurements.
• Cost savings in record-keeping.
• Possible reductions in production costs.

Companies can gain greater cost control by setting standards for each type of cost incurred and then highlighting exceptions or variances—instances where things did not go as planned. Variances provide a starting point for judging the effectiveness of managers in controlling the costs for which they are held responsible.