Purpose, advantages and disadvantages of a standard costing system; terminology: standard cost, variance analysis
A standard costing system sets a target cost for making a product. Variance analysis then compares that target to the actual cost and explains any difference.
Formula
Variance = Standard cost − Actual cost
Real World
Cadbury sets a standard cost for producing each bar of Dairy Milk; if cocoa prices spike unexpectedly, variance analysis reveals an adverse materials price variance that managers must investigate.
Exam Focus
Label every variance as 'favourable' or 'adverse' and state whether actual was above or below standard to access full marks.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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