Benchmarking is a systemic, analytical approach to cost accounting. It uses company and industry standards of performance called benchmarks as a basis. Based on those benchmarks, accountants use variances to evaluate a company's performance. Variances basically equal the differences between expected costs and actual costs. Companies use benchmarking to evaluate variances against standard costs, thus providing critical information to assist in improving product development and the production process. Typically, managers apply variance analysis using benchmarks to direct labor, direct materials, and overhead costs, since these are often the simplest cost data to gather. Companies need to carefully track these costs to keep analyses accurate.
At A Glance
- Businesses can use standard costs as a baseline in the benchmarking process.
- Standard costs can come from past analysis or industry standards.
- Benchmarking compares actual line items to industry standards or past results.
- Benchmarking requires variance analysis against standard costs, and companies determine the standard cost per unit as part of the benchmarking process.
Direct materials are one of the largest costs for most businesses, which is why managers calculate the difference in value from the raw materials price and the output from those materials.
Direct labor is a significant cost for many businesses, which means accountants calculate the variance between standard and actual amounts.
Variable overhead can have a large variance depending on how much or how little a business produces in a specified time period.
Overhead variance is an indicator of how efficient a process is.