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CA Intermediate · Cost and Management Accounting · Standard Costing

Which statement about a standard costing system is correct?

Management by exception is correct: in standard costing, managers concentrate on significant variances from standard rather than reviewing every result. Ideal standards ignore inefficiencies, favourable variances can hide problems such as poor quality, and standards can be revised when conditions change materially.

  1. AIdeal standards assume normal inefficiencies and are the most realistic for motivating staff
  2. BA favourable material price variance always indicates good purchasing performance and needs no investigation
  3. CManagement by exception means attention is focused on significant variances from standardCorrect
  4. DStandard costs are fixed once and must never be revised even when input prices change materially

Explanation

Standard costing supports management by exception: only significant deviations are investigated. Ideal standards assume no inefficiency, not normal inefficiency. A favourable price variance may stem from poor-quality purchases, and standards may be revised when conditions change.

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