Variance Analysis — OpenTuition Forums

RRashard6y ago

Hi sir, I want to know why closing inventory is deducted at standard cost (instead of actual cost) from actual total cost to arrive at actual profit. Everything is actual there, but only the figure of closing inventory is at standard cost. Please explain why? Thanks

John MoffatTutor6y ago#1

Have you not watched my free lectures, because I explain this in my lectures!!! In practice variance analysis is usually done monthly. Some months costs are likely to be higher than standard and other months costs are likely to be lower than standard. We normally assume that the standard costs remain sensible and it would therefore be confusing the keep changing inventory values each month (we are obviously not worried in management accounting about financial accounts 'rules'). In practice the standard might well be changed during the year, but not in Paper PM.

RRashard6y ago#2

Okay sir. Thank you so much.

John MoffatTutor6y ago#3

You are welcome :-)

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