Standard Costing. OBJECTIVE 1: Define standard costs, and explain how standard costs are developed, and compute a standard unit cost. What are the benefits organizations derive from standard costing and variance How will standard costing be affected if a company uses a single conversion. LEARNING OBJECTIVES: After studying this unit you will be able to: • Understand terms as standard Cost, standard Costing, standard Hour. • Understand how.
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PDF | Standard costing is a traditional cost accounting method and still an important aid to management for cost control purpose. The aim of this. A standard costing system is a method of cost accounting in which standard costs are used in recording certain transaction and the actual costs are compared. Standard costing is a technique which uses standard for costs and revenues for the purpose of control through variance analysis. Here, standards are.
On the other hand, team work requires a motivated workforce. When the employees are demotivated, team work is rarely achieved yet it is the backbone of effective cost control Datar et al, Therefore, for budgeting to be effective, team work is needed.
The relationship between these two is fundamental in effective cost control in the motor industry.
Since the implementation of standard costing system to control costs of an entity calls for effective communication and coordination within all departments of an entity, it becomes the objective of management to keep all departments working together in adherence to set standards so as to achieve effective cost control and profit maximisation. Cost management is an exercise done by management of managing the expenses of a business through the comparison of actual financial results with the budget upon which the resource allocation was based, and analysing the variance Horngren et al, Furthermore, Jordan argued that variance analysis is only made on significant deviations and it is based on responsible centres and communicated to appropriate personnel for corrective action.
Challenges faced in cost management often arise when there is no costing technique under implementation to monitor costs or when the effected costing system is not being used appropriately or effectively Horngren et al, In addition, Periasamy asserted that in an entity with a goal of profit maximisation, there is more likelihood of finding a costing technique under implementation to monitor and reduce costs. Therefore, since the case study firm has a profit maximisation motive, it has standard costing system under implementation.
Ngozi noted that the inappropriate implementation of a costing technique results dominantly in cost management problems.
De Waal postulated that there is need for educating all employees of an entity about an installed costing system for the system to produce desired results. Educating employees can be through seminars or workshops. Management itself should be well versed with the costing system that it has implemented Datar et al, Standard costing system is a costing system that needs to be known thoroughly before it can be effectively implemented to positively reduce costs.
According to Badem et al , challenges with the implementation of standard costing system are synonymous to challenges faced in cost management within an entity that uses standard costing system in cost control. Kaplan and Atkinson noted that there are ideal standards, basic standards and expected standards.
Expected standards are based on expected performance and these are often attainable because they are based on information received from the workers who have on-hands experience. However the other standards lack consultation in setting them up. Failure to set appropriate standards due to lack of consultation leads to increased wastages by workers in operations which ultimately increase operating costs.
Variance analysis to correct adversities caused by such would not result in positive results. Laurie supported this when she noted that workers have a tendency of being reluctant to increase their effort when management excludes them in planning for matters that concern them. This means that when there are standards for the quantity of spare parts that the automobile firm should store, there should be policies implanted so as to ensure that the standard inventory level is maintained.
Ineffective policies for operations might lead to ineffectiveness of cost management since more inventory trigger more storage costs and less inventory causes stoppages in vehicle service which results in lost sales. Galbraith is of the opinion that to keep up to date with dynamics of industries, management should be flexible and innovative in policy setting.
Poorly motivated staff discourage teamwork which causes coordination problems in an entity Laurie, In an automobile firm, if the workforce is demotivated, coordination amongst departments lacks which causes additional operating costs such as telephone charges. De Waal postulated that management has the obligation of monitoring company performance in a way that increases the motivation level of employees. A motivated workforce works as a team, and teamwork is recognised by Anderson et al as a fundamental in effective cost management.
Further research has also opined that team work requires a motivated workforce. Management thus has to regularly sacrifice costs relating to employee fringe benefits, involving workers in budgeting, holding periodical parties for targets achievement among other efforts to motivate its workforce Hanfy, Modern day managers, who are often supervising considerably more individuals now the earlier managers did, are delegating more tasks and responsibility to subordinates, which is commonly called employee empowerment Malone et al, Furthermore, Malone et al argued that more employees find themselves with increased accountabilities, and managers act as coaches who assist employees to solve problems, as compared to being decision makers who issue commands and monitor compliance, and this empowerment of employees leads to staff motivation.
Allocation of work to employees is another challenge faced in cost management. In the motor industry, poor work allocation by management leads to rushed jobs which are often defect jobs. Defect jobs increase customer complaints and they have to be redone at zero charge. This causes unplanned additional costs. For cost management to be effective, there is need for timely feedback for corrective action to be done Horngren, Management should educate workers on the essence of effective communication within the entity as it is key in cost management.
When feedback is received late, the corrective action plan decided by management would have less value in correcting the adversities since the motor industry is regularly evolving.
In support of this, Galbraith said that what is regarded as innovation in industries today, needs revision tomorrow. Poor service delivery pushes customers away and the sales volume of the automobile firm decline.
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In some cases, feedback is received in time from employees but management takes time to decide on the corrective action. In fast changing economic conditions, the effects of delays in correcting deviations from planned results in ineffectiveness in cost management. Management should do periodical checks of progress through analysing weekly, monthly or quarterly reports on operational performance and set periodical dates of analysing reported variances Datar et al, Cost management is also hindered by the weaknesses associated with the implemented cost control system.
Badem et al noted that even if standard costing system is still widely used in industries as a cost control tool, it has some weaknesses related to its implementation. Democratic or participative style of management and periodic performance evaluations are necessary for standard costing to effectively control costs Periasamy, Commitment should be noted from both the management and the employees in working as a team towards the achievement of targets.
The shortage of either of these requirements distress successful implementation of standard costing system.
However, in the motor industry, jobs on customer vehicles are recognised as batches of either minor service or major service. The procedures carried out on each job, whether major or minor, would be known, structured and fixed, and standards can be easily set for work and variations analysed.
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It is in this regard that, for effectiveness in cost control and profit maximisation at large, an entity should appropriately implement standard costing system. According to Datar et al , implementation challenges often arise in the various stages of the standard costing system set up, that is, either during set up of standards, following through operations to confirm adherence to plan or during feedback stage.
Time consumption in standard setting especially when there is consultation of employees is one of the problems encountered in standard costing implementation Long Ho, Standard setting on its own is an exercise that requires technical skills Klychova et al, In an automobile firm, the technicians in the workshop are the ones with the knowledge of labour hours needed to complete a job because of their working experience. Developing a reliable standard that is achievable will consume time.
This time used up in standard setting may imply an opportunity cost for vehicles that the automobile firm could have sold or serviced. According to Bhimani et al , standard setting and revision of standards is commonly done in periodical intervals of six months or yearly so as to reduce time wastages and costs related thereto.
Some standard costing systems are very intricate, therefore they are not well understood by responsible management and the employees Cunningham et al, For that reason, the implementation of standard costing system gets difficult. This persuades for staff training before proper implementation, and results in increased operating costs. Ultimately, the standards will not be achieved and the main objective of cost control will not be fulfilled.
For workers to attain the set standards, there is need for management to educate them of the strategies which they should adopt in doing work Horngren et al, An organization can adopt various standards and these include; basic, theoretical, and achievable standards Drury, Henceforth, what is defined as a standard in an entity rests on its management philosophy and that shows the subjectivity behind Periasamy, In the motor industry, an area that is often subjective in standard setting is the expected labour hours from technicians.
When standards are achieved, management can further revise the standards till they get to a point that ensures profit maximisation.
Without prior consultation, standard costing implementation would not effectively produce desired results Weygandt et al, Marie et al noted that with a fast changing business environment, standards tend to get obsolete.
Q. 6. What are the characteristics of Standard Costing?
OCNEANU defines standard costing as a system of cost accounting that is designed to find out the cost of a product under the present conditions. When the conditions are not current, the accuracy of standards is distracted. This also implies that when standards are set based on the present conditions, and those conditions change before the end of the assessment period, the originally set standards become obsolete.
When the standards are obsolete, they maybe be an ideal reflection of the wanted results but they would not be achievable Ngozi, ; Marie et al, Revising the standards to match with the change in conditions, results in increases in costs of administration and other expenses related to standard setting and revision. It becomes a challenge that when the business environment is frequently changing, standard costing becomes an ineffective and costly tool to implement in cost control Badem et al, With the competitive nature of the motor industry in Zimbabwe, business environment conditions change regularly and that results in the set standards of an automobile firm obsolete, resetting of standards results in additional costs.
Often times these additional costs would not be planned for by management. The problems relating to the implementation of standard costing system would require management in its capacity to address and solve them so as to enhance effective cost control.
As outlined by Horngren et al , effective standard costing implies that there should be effectiveness target setting, resource allocation and administration, reviewing of actual results in relation to expected results and documenting deviations, variance analysis and corrective action plan that enables the elimination of the variations.
According to Periasamy , understanding implementation procedures and the preliminaries for setting up the standard costing system encourages effectiveness in implementation of standard costing system.
Study of technical aspects of factory is one of the preliminaries for standard costing set up.
This is a study of the processes done in the various departments found within an entity in which costs and income are incurred and generated respectively. Trends of process resultants are analysed during the study of technical aspects so as to ascertain the normal efficiency level in each factory process Groot, In a company within the motor industry, technical aspects of factory includes the workshop division and its sub-divisions which are the panel beating department, mechanic department, the vehicle selling department, as well as the motor spare parts department.
The administration and accounts departments also supplement the above departments in cash management and its accountability. Factory setups differ from industry to industry, and with the motor industry, the above mentioned departments form the basic setup of automobile company structure.
Periasamy believes that this study assists management in successful standard setting since effective standard costs should be based on actual situation in the entity and awareness of flaws within certain factory processes are recognised and improved.
Since the factory processes are studied in relation to factory departments, there is need for clearly defining various departments within the entity as these form the cost centres. Defining cost centres is key in effective standard costing system because costs are incurred at cost centres. Lamen et al defined a cost centre as an item of equipment, person or place where costs may be incurred, then recorded and used in cost control.
In an automobile firm, a cost centre might be a technician, the workshop itself, administration department, panel beating shop, parts department, and hoist for lifting vehicles during servicing, among others. Identification of cost centres is vital in determining responsible centres for adverse variances so that corrective action and rewarding for favourable variances can be easily done. Responsible centres are managed by various persons and effectiveness in managing cost centres, persuades to the need for clarification of line of control for effective reporting of operations and management of cost centres.
Clarification of line of authority is also essential in effective cost control. Kaplan and Atkinson noted that line of authority relates to supervisory roles, proper delegation to capable personnel so as to reduce errors in doing work. Errors in doing work might result in additional costs of re-working jobs and reducing errors also saves time.
Working towards set standards can be closely monitored and when concerns arise, the responsible manager can act quickly Klychova et al, When the communication channels have been clearly established, the management can proceed to set the standards that they want to achieve.
Correct standard setting is a huge challenge especially in economies where conditions are ever changing. Although management want to achieve certain targets, it should be noted that the targets should be those which the available resources in the entity can achieve.
Standards exist in several types which include theoretical or ideal, expected or attainable and basic standards Kaplan and Atkinson, The aim of management in effective cost control would be to set expected or attainable standards. However, various scholars of managerial accounting noted that standard setting is limited to available workforce, working hours, market base or even the management style which might deny expected standards to be attained.
All the above limitations should be addressed during the study of technical aspects of the factory by management. Datar et al highlighted that the standards to be set should be achievable and motivate employees to work towards achieving them. When standards are too high, employees are demotivated and their enthusiasm towards work will be reduced.
Difference Between Standard Costing and Budgetary Control
However, when the standard is too low, it causes relaxation in workforce and they end up putting less effort. For an automobile company, this implies that huge effort should be put in coming up with the right standard for labour cost, motor spare parts cost and overhead costs.
Inability to fix correct standards, also result in the entity incurring standard setting costs more frequently than what management would want OCNEAU, Periasamy noted that the standard setting committee should include functional heads as representatives of all functions, such as workshop manager, parts manager, cost accountant, service manager for a company within the motor industry. Having representatives of all departments reduces the time taken in effecting corrections. After standards are set, the policies of the company need to be reviewed in light of the standard costing principles Klychova et al, Policies plays a big role in enforcing workers to deem the standard costing system seriously De Waal, The existing methods and policies regarding allocation and appropriation should be reviewed in the light of the standard costing principles Kimmel, When the costing system is taken seriously by workers, the possibility of its effectiveness in cost control increases.
One of the policies that can be effected to encourage effective cost control is a policy that allows workers to be educated about the costing system.
The staff concerned with the implementation of standard costing should be given proper training before the introduction of the system so as to work with effectiveness and ensure successful cost control Datar et al, Training of staff might assist in motivating them and bringing them together to work as a team.
Jordan postulated that when all staff members are aware of the standard costing system under implementation, management would be left with effective variance analysis to make the system complete. Variance analysis involves identification of deviations from set standards and analysing the reasons for the deviations Bhimani et al, Variance analysis is carried out by management as part of cost control procedure Drury, On the same note, Weygandt noted that costs exist in either controllable costs or non-controllable costs, and it is only the controllable costs that management can control.
According to Kimmel , the accumulation of costs in a section of the entity cost centre and reporting on the level of the costs by the responsible supervisor who has control over the operations of the section makes up responsibility accounting.
Non controllable costs are therefore costs that are not significantly influenced by the actions of the management. Controllable costs are related to a particular managerial area of responsibility, the head of the responsibility centre has significant influence on its controllability and they are relevant for the time period under review Weygandt et al, From the first characteristic, for the top management responsible for the whole company, it means that any cost incurred by the firm is their responsibility, hence controllable.
Siyanbola et al noted that all costs are controllable when the company is viewed as a single entity. This implies that costs are uncontrollable only at intermediate and lower levels of management. A study of the Turkish automotive industry concluded that, regardless of the changes in the business world at large, standard costing system remains a very effective tool in cost control Badem et al, From the above mentioned research papers, it can be concluded that the benefits attached to the implementation of standard costing system in the motor industry have justified the continuous existence and implementation of this costing system in the industry.
Standard costing facilitates cost reduction through a framework of maintaining costs within the budgeted figures. Every costing system aims at cost control and cost reduction. The standards are being constantly analysed and an effort is made to improve efficiency. The standard costing system gives room for evaluation of the variations after an assessment period.
Horngren et al postulated that standard costing leads to effective cost reduction. Drury noted that budgets provide the foundation of standard costs. An example is the control of fault jobs on customer vehicle. Maintaining the number of defect jobs in the budgeted levels will reduce additional free service expenses.
The standard cost is used as a guide in coming up with the selling price since it forms the expected production or service cost to which the profit component is added to derive the standard selling price Cunningham et al, Therefore, standard costing system simplifies pricing of vehicle service charges and motor spares in an automobile firm.
After a period of noting down the price variations of various suppliers of motor spares or studying the market prices of motor spares, an automobile firm can use standard costing system to peg a certain price for acquiring a specific motor spare in the beginning of a reporting period. The standard value is what is used to determine the selling price of that motor spare by adding a mark-up to it Bhimani et al, In the course of the period, all motor spares will be sourced with the pegged acquisition price in mind.
If all motor spares are successfully downloadd within the pinned download price values, the firm would have successfully implemented standard costing method to price its motor spare parts Long Ho, By doing so, the firm increases its profit maximisation capability.
Standard costing system supports the valuation of inventory. When the number of inventory units existing is identified, the inventory value is then reached at by multiplying the existing units by the standard cost per unit Bhimani et al For the motor industry, when the motor spares in the shelves do not tally with the quantities binned in the computer system, at end of the stocktake, an inventory valuation is carried out. The new quantity of inventory that is multiplied by the inventory price would be the physically present quantities in the shelves.
Valuation reports sent to management also assist the management in making informed decisions of how to control theft and wastages of motor spares.
Motivation of employees is enhanced through the use of standard costing system. According to De Waal maximum participation is required from all members of the organisation when standard costing system is being appropriately implemented. The full participation triggers a zeal of goal achievement in the personnel of the organisation which has a motivating effect and the employees feel more responsible to the decisions made regarding cost control.
Standard costing system comes with elimination of inefficiencies such as material wastages. Various cost elements calls for in-depth study of the aspects that results in cost upsurges and this thorough study ultimately result in the curbing of unnecessary wastages resources Kaplan and Atkinson, Studies are carried out on each and every possible cost centre so that when it is finally decided to set anticipated results, they will be comprehensive of as many factors as possible Anderson et al, When wastages are eliminated in the servicing of motor vehicles, costs of over-consumption of material are reduced.
For the administration department, recording of all stationery items upon issuing of new stationery is another way of keeping costs to estimated levels. This costing system also supports management by exception in that focus is put on correcting the responsible centre. According to Long Ho , management by exception basically means that the management supervise all the operations and each and every member of the organisation is expected to work towards the attainment of targets.
The time that management save in focusing to points of correction can be ploughed in other activities that are not cost related but are in line with profitability maximisation, such as identifying new markets to exhaust. There is simplification of performance appraisal through the use of standard costing system Datar et al, It has been established by various scholars that standard costing develops cost awareness within the entity. When there is cost awareness in the entire entity, it is easy for management to carry out variance analysis.
When performance is evaluated and targets met, management can organise for a party to motivate the employees and encourage them to keep putting their maximum effort in work Laurie, Standard costing remains a widespread tool for businesses because it does result in reduced costs and in many Japanese companies such as Toyota Japan, the use of standard costing has significantly reduced costs Long Ho, Chapter Three will illustrate the research methodology of the study, showing the methods the researcher will use on the study.
Flick expounded a research methodology as a defined avenue that a researcher takes in solving a problem addressed by the research. The research design, population studied, sample size and design, sample procedures, sources of data, data collection instruments, reliability and validity of data, data presentation and analysis, ethical considerations are all included in this chapter.
A summary to the chapter is also included at the end of the chapter. The above implies that a research design is the ultimate plan for relating the theoretical research problems to the relevant empirical concern. Flick noted that a research design can either be descriptive or explanatory. The research used the descriptive research design.
According to Bryman and Bell , a descriptive research design is a structured research design that provides a valid and accurate representation of the variables that relate to the research questions.
A mixed research method was used in conjunction with the descriptive research design.
Effectiveness depends on Environment For standard costing systems to be effective in cost control and performance evaluation, then a participative and democratic management style is required. The top management and employees need to be committed to attaining the set standards of performance. An effective and efficient management information system is also required so as to provide employees and managers with reliable, accurate and timely feedback regarding their performance.
Lack of one or more of these requirements frustrates the success of a standard costing system so that its effectiveness cannot be realized. It is Subjective As we have already seen, there are several types of standards that an organization can adopt basic, ideal, attainable and cement.
What is therefore a standard in an organization depends on its management. If this subjectivity is poorly managed, for example, punishing employees for insignificant unfavourable variances of for variances arising from factors beyond their control , then a standard costing system can lead to employee frustration and poor goal congruence in the organization.
Other Custom Business Writing services Businesswritingservices. Thank you very much team at BWS My dissertation was to the point. I salute the writer who penned it down. Skip to main content. Log In Sign Up. A Case Study, Paul Eisenberg. Given deteriorating sales revenues over the period However, he considers steady improvement and servicing individual customer demand to be thwarted by the standard costing system.
The case study is produced using scientific literature on management accounting.
The sources used can be verified through the list of references attached to the case study. Findings Description of the standard costing system Under this system, standard costs for material, staff and other expenses are established based on management estimates of prices, the materials and labor usage as well as budgeted overhead costs and production volume ACCA, a.
These standards can be used for inventory valuation and compared to the actual costs Sangster and Wood, The variances, i. How does the standard costing system address these requirements? The company should strive for financial as well as operational improvement.
Financial improvement can be achieved via standard costing through better cost controls Bhimani et al. Regarding operational improvement, the modern TQM focusses on the customer relationships instead of production processes Boniface and Augustine, Efficiency is not measured by output, but by customer complaints, returns and re- working Nath De, According to the OM, cost cuttings were achieved to the detriment of customer service.
This contradicts the TQM philosophy. However, the success of ASL depends on its strategic approach. If it is to follow the cost leadership strategy the company should go on focusing on cost reduction Porter, In other words, idle time occurs due to the difference between the time for which workers are paid and that which they actually expend upon production. Primary data collection was tailored to meet the specific needs of the researcher as interviews questions were altered in relation to individuals that were being interviewed.
How many years have you been with South East Toyota Pvt.
Identification of cost centres is vital in determining responsible centres for adverse variances so that corrective action and rewarding for favourable variances can be easily done. The researcher categorised the recommendations in the three phases of the cost control using costing systems setting, operational and feedback phase that were noted by Siyanbola et al so that each recommendation can be easily linked to the each phase in the implementation of standard costing system by the company.
Accordingly when flexible budgetary control operates with standard costing fixed expenses, variable expenses and semi variable expenses are computed either on the basis of ratio method or variance method for different levels of activity. Easy The following labor standards have been established for a particular product: Standard labor hours per unit of output..
South East Toyota Pvt. P48, unfavorable. Standard for Direct Material Cost The following are the standard involved in direct materials cost:
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