How does standard costing facilitate performance evaluation?

Standard costing facilitates performance evaluation primarily by allowing managers to compare actual costs incurred during a period to predetermined standard costs. This comparison is instrumental in identifying variances, which represent the differences between expected performance and actual performance.

When standard costs are established, they provide a benchmark for what costs should be under normal operating conditions. By analyzing the variances, managers can assess the efficiency and effectiveness of their operations. If actual costs are higher than standard costs, it may indicate inefficiencies or issues that need to be addressed. Conversely, if actual costs are lower, it might suggest effective cost management or operational improvements.

This method of evaluation encourages accountability within departments and promotes the identification of areas for improvement. In essence, standard costing serves as a guide for performance management, helping organizations benchmark their achievements against these standards to drive continuous improvement.