Discussion Board Question and the Current Event Response

Answer

How Standard Costs can be used by Management in Planning and Control

Standard costs and how they can be used by management in planning and control

Standard costs refer to the organization's estimated costs, which are to occur during the production of goods and services. It refers to the amount of money a company has to incur in production under normal conditions (Mohr, 2017). In every company, proper planning is critical in helping the organization discover its strategic position and develop a competitive edge over its competitors. Therefore, they have to set predetermined costs or estimated future costs for planning purposes. Standard costs are thus an integral part of every company's operating budgets and profit plans (Mohr, 2017). While accounting for standard costs, a firm must consider direct materials, direct labor, and manufacturing overhead, all of which are key in production and profitability.

Companies with proper standard costing systems record their standard costs under inventories and the cost of goods sold accounts. This is because the company has to account and make payments for the production workers, vendors, and the actual expenses incurred during the production process, all of which make a significant difference (Farkas et al., 2016). In essence, there is often a small difference between actual manufacturing cost and the standard costs, a difference commonly referred to as cost variance. This difference is usually an indicator that the company is deviating from the profit plan, making it an essential tool for the management.

The management can use this strategy in planning and control in various ways, including budgeting (Panchenko, 2017). Standard costs allow a company to make a budget, which is usually an estimate that has to compare with the actual costs. It also allows the company to set product prices since the calculation of price involves considering the manufacturing costs. Moreover, companies can also use standard costs to improve their financial record keeping since it assumes no price fluctuations, which makes the planning and control process easier and faster (Panchenko, 2017). The company can further use standard costs as a means of assigning a value to its inventory. Since inventories are integral in planning and control, using the standard cost in calculations is often much more comfortable because it is likely to be close to the actual cost.

Why is it important to consider the relationship between cost, quality, and selling prices when establishing standards for direct materials?

The cost of production plays an essential role in determining the selling prices for goods and services. Therefore, when seeking to establish the standards for direct materials, companies must make critical considerations to all the underlying factors in production, which will ensure that approximated costs are as close to the actual costs as possible (Rathod, 2015). The costs for direct materials provide an avenue through which the company can set profit margins, especially in line with the contemporary market situation. The choice of direct material depends on the presence of competition and the market price, such that when a firm sets its price, it can withstand the competition and exhibit a significant level of market control. The quality of the materials also influences the quality of the product. Since direct materials price standard entails determining the expected price of the unit material, its quality and cost must be considered (Rathod, 2015). Otherwise, the company's planning and control will only prove futile. Furthermore, it is through the consideration of cost, quality, and selling prices that developing a forecast of the revenue stream becomes possible and rational. This makes the standard costs an inevitable component of company financial planningdownsides, hence facilitating an effective engagement process.