Economics · Cost Accounting

Assertion: A system of standard costing is virtually ineffective and can lead to dysfunctional managerial behavior in an organization that operates in a highly volatile environment where the prices of raw materials and labor rates fluctuate daily due to global macroeconomic factors beyond the firm's control. Reason: Standard costing relies on the principle of Management by Exception, which requires stable benchmarks; if variances are constantly large and triggered by external market volatility rather than internal operational inefficiencies, the reports lose their diagnostic value and fail to provide a fair basis for performance appraisal.