Question

Every organization, regardless of its profitability or growth, has to maintain control over its expenses. And when customers are cautious in their spending choices, the need for managers to use budgeting and variance analysis tools for cost control becomes especially critical. By studying variances, managers can focus on where specific performances have fallen short and make corrective adjustments and achieve significant savings for their companies. The drive to achieve cost reductions might seem at odds with the growing push for organizations to pursue environmentally sound business practices. To the contrary, managers looking to be more efficient with their plants and operations have found that cornerstones of the sustainability movement, such as reducing waste and power usage, offer fresh ways to help them manage risk and control costs.

Discuss how establishing standards benefits the following management functions: performance evaluation and decision making.

Answer 1

Establishing standards allows managers to evaluate performance effectively through variance analysis and make informed decisions by providing clear cost benchmarks. This supports both financial and environmental sustainability within organizational practice.

Step-by-step explanation:

Establishing standards is crucial for performance evaluation and decision making in management. By setting benchmarks for cost control, managers can assess performance through variance analysis, identifying where actuals diverge from the standards. This informs necessary corrective actions, promoting operational efficiency and cost savings. Standards also facilitate decision making by providing a clear framework for evaluating the profitability and sustainability of different production levels and operational practices.

For instance, understanding fixed cost, marginal cost, average total cost, and average variable cost aids in making strategic decisions to optimize production and pricing. In the context of environmental sustainability, standards guide firms to adopt practices that reduce waste and power consumption, aligning cost control with ecological responsibility. Incorporating these sustainable practices can lead to cost reductions and risk management, demonstrating that environmental and financial objectives need not be in conflict.