Standard Costing: Identifying the Incorrect Statement

The question asks to identify the statement that is not correct regarding standard costing.

Statement Analysis

• Statement 1: Standard costing uses pre-determined costs for organizational control. This is a fundamental principle of standard costing, used for budgeting, performance evaluation, and control. Therefore, this statement is correct.
• Statement 2: Standards can be set in both physical units (quantitative) and monetary values (e.g., cost per unit, total cost). This is accurate as standards must cover both the amount of input and its cost. Therefore, this statement is correct.
• Statement 3: "Only adverse variances are investigated intensively." This statement is incorrect. While adverse variances often require immediate attention, significant favorable variances should also be investigated. Investigating favorable variances helps understand what went well, potentially identify best practices, and replicate positive outcomes. Ignoring them can lead to missed opportunities. Standard costing emphasizes investigating significant variances, regardless of whether they are favorable or adverse, to understand the reasons behind the deviations.
• Statement 4: Standards are determined for each component of cost, such as direct material, direct labor, and overheads. This is a core practice in standard costing to ensure comprehensive cost control and analysis. Therefore, this statement is correct.

Conclusion

The practice of investigating only adverse variances is not aligned with the principles of effective standard costing and variance analysis. Both significant adverse and favorable variances warrant investigation.