BUSINESS AND LAW

“The standard product cost systems typical of most organisations usually lead to
enormous cross-subsidies across products. When such distorted information
represents the only information on ‘product costs,’ the danger exists for misguided
decisions on product pricing, product sourcing, product mix, and responses to rival
products. Many firms seem to be falling victim to the danger”
Johnson H.T. and Kaplan R.S. (1991) Relevance Lost: The Rise and Fall of
Management Accounting
In recent years, writers have argued that standard costing and variance analysis should
not be used for cost control and performance evaluation purposes in today’s
manufacturing world. Its use, they argue, is likely to induce behaviour that is
inconsistent with the strategic manufacturing objectives that companies need to
achieve in order to survive in today’s intensely competitive international economic
environment
(a) With reference to appropriate academic sources, explain the arguments referred to in the
above paragraphs concerning the relevance of standard costing and variance analysis.
(b) With reference to appropriate academic sources, explain the arguments in favour of the
relevance of standard costing and variance analysis in the modern manufacturing
environment.
(c) Drawing upon your answers to a) and b) above and appropriate academic sources discuss
the extent to which Johnson and Kaplan’s statement remains true a quarter of a century
later

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