Question

Which of the following is a reason companies use standard costs?

A) to enhance customer loyalty
B) to set sales prices of products and services
C) to share best practices with other companies
D) to ensure the accuracy of the financial records

Answer 1

Companies use standard costs to ensure the accuracy of financial records, which helps in cost control and efficiency evaluations. This management tool is vital for internal performance benchmarking and is not intended directly for setting sales prices or enhancing customer loyalty.

Step-by-step explanation:

Companies use standard costs primarily to ensure the accuracy of financial records. Standard costs serve as a managerial tool for cost control and are integral in the budgeting process and variance analysis. They aid in evaluating the efficiency of production processes and cost management. Using standard costs helps managers set expectations and measure performance against those benchmarks. It's not primarily about enhancing customer loyalty, setting sales prices, or sharing practices with other companies, although these can be secondary benefits.

Breaking down total costs into fixed costs, marginal costs, average total costs, and average variable costs provide insights for the firm, which can help in determining the profit-maximizing quantity to produce and price to charge. Firms tend to operate at the bottom of the long-run average cost curve to take advantage of economies of scale and be competitive in the market.