Use of the Production Function in Calculation of Standard Cost Variances-An Extension.

The article presents information on the use of the production function in calculation of standard cost variances. The two purposes of this paper are: (1) to show that the variances, depend critically on a restrictive assumption concerning the introduction of inefficiency or waste in production and suggest a refined model which avoids this assumption and (2) to address secondary issues concerning inefficiency in production. The model presented here assumes that the objective of the firm is to minimize the cost of producing a given output level using two material inputs subject to a production function. These inputs are substitutable at rates specified by the production function. The production function is a technical constraint which states the maximum output obtainable from every possible input combination or process. Once the level of output is given, the production function can be represented by an isoquant specifying all input combinations or processes which yield the given level of output.