Standard Costing

Introduction to Management Accounting Lecture: Albert De Jonge Student: John Alejandro Eusse Agudelo Submission date: 20/04/12 Contentpage Introduction3 Standard Cost3 History of Standard Costing4 Disadvantage of Standard Cost4 Advantage and benefits of Standard Costing 5 & 6 The relevance of standard in Brittan and rest of the world6 Overhead 7 Conclusion8 Reference and Bibliography9 Introduction

This report is based on the relevance of standard costing in Modern Britain, the report will include so fact and evidence that standard costing is relevant or not relevant for a 21st century Britain. To clarify more on this topic and to support my argument and discussion it will be necessary to use empirical evidence such as case studies from social scientist and scholars specialised in the subject. The assignment will focus on how standard costing is relevant in the UK compare to Germany and Japan.

The aim of this report will be to present an argument for and against standard -costing. My findings will determine what evidence to use so that, the report will be unbiased and well presented according to the assessment task. Lastly there will be difference between standard price and standard cost, this will be made clear and explain further. My research will be done through Internet source textbooks. Standard Cost “Standard cost is usually associated with a Manufacturing Company’s cost of material and direct labour and manufacturing overhead”.

Standard cost is different from Actual cost because standard cost is an estimate put together, Standard costing is a reliable technique used to manage and improve the performance of an organisation, standard costing can be seen to the same or similar to Activity based costing (ABC) but has often been criticized to be outdates and lost relevance but it was also suggested that the best techniques for controlling cost and performance management is to use ABC and standard costing

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Standard costing is a management tool used to estimate the over cost of production assume normal operations in other words, the estimate cost of material, labour overheads and other cost for each unit of production or purchase in a given accounts period. The basic concept of standard costing should be discuss clearly because it form the bases of the argument s to weather standing is relevant or not in the recent times. The charted institute of management Accounting, London, defines standard costing as “the preparation of standard cost and analysing cost the causes of variation with a view to maintain maximum efficiency in production.

From the above definition, there are some key words that needs to be noted and explain for clarity of this report, one of which is standard cost – which is defined by the institute of cost and work Accountants as standard cost are prepared and used to clarify the final result of a business particularly by measurement of variations of actual cost from standard cost and the analysis of causes of variation for the purpose of maintaining efficiency of executive action. History of Standard Costing

For over 100 years, standard costing has been used for valuing stock and work in progress “some historians say the origins of costing go back even further and have found evidence it was used in American Civil war by quarter master as a means of controlling cost. It doesn’t really matter when the technique was invented what is more important is that it is still in use today” “In 1989 a survey showed that standard costing was being used by more than 75% of British Industries e. g. brewing, textile, electronics and Pharmaceuticals. Disadvantage of Standard Cost

There are many article and books that criticise standard costing as a technique that’s in appropriate as capital intensive industries with high level of fixed overheads. Some Journals articles from the US in recent years indicate in use and although a 100 years old has definitely survived the test of time. It can be used effectively to those industries which are producing standardised product and are repetitive in nature , examples are transport for London, Salt industries etc. Standard costing is not suitable in situations where a variety of different ind of tasks are being done e. g. this is one of the weakness of standard costing it does not include overheads Standard cost variance report is usually prepared on monthly bases and often is released days even week after the end of month. As a consequence the information in the report may be so stale that it is almost useless. Timely frequent report that are very precise but out of date by the time they are release some companies are now reporting variances and other key operating data daily or even more frequently.

If managers are intensive and use variances report as a club, morale may suffer, employees should receive positive reinforcement for work well. Increase in Labour doesn’t necessarily mean production will increase because output is depended on processing speed of machine. “(George Brown 2000) mentions that they can be improvements and changes which may be aided though the monitoring of variance trends though time. Trends may be monitored in order to establish whether the situation is deemed to be in control with variance fluctuating within acceptable limits.

Alternatively, the variance trend may indicate an out of control situation which must be investigated with a view to improving and changing product design, production methods. Etc” “Many candidates are unable to carry out necessary computational aspects of an examination question. This is likely caused, at least in part because of a lack of understanding of physical situation which the data is intended to represent. A further problem is lack of ability to relate the physical information that has been calculated and the discussion about it relevance as a business tool in planning, control etc. Advantage and benefits of Standard Costing The benefits of using standard costing is that it can be used by management and managers as marks against which the performance of an organisation or of a department can be measured, it’s a good control tool for every activity it is not only a cost control tool but also help in help in production planning and decision making policy formulation and allows management by exception. “(George Brown,2000 ) states that it’s a useful part in management accounting tool kit which has also been increasingly questioned.

The extent to which standards have a role to play in modern business is linked to the adaptation of progress, market and policies in changing business environment. “ The rate of change in product type and design due to technological improvements, customer requirements and increased competition has led rapid to change in how business operate. The need to respond to customer demands for speedy availability of products, shortening product life cycles and higher quality standards has contributed to a number of changes in the way in which business operate.

These include: Just in time system allied to flexible manufacturing systems aimed to ensure that customers demand may be satisfied on a pull though basis. Stock and work in progress Will be minimised and the business operating cycle tailored to cater for the specific customer requirements. Total quality programmes aim at continuous improvement, with the identification and elimination of non value added activities and the effective provision of added activities.

Great emphasis on the value chain, from close link with suppliers of input materials and services to identification of customer needs in respect of quality, deliver and changing requirements though time. cost control standard costing system help to improve cost control and cost reduction, This involve the whole process of setting the standards second is a routine comparison and analysis of performance and expenditure against these standards and lastly is the ability to express and study the variations in monetary terms and implement corrective measure. (George Brow, 2000) asks what of standards in modern business? Can planning and decision making be accomplished in an effective manner without reference to some standard or based and without recourse to some measurement though time of achievements of, progress towards or variation from such standard or base? What elements of traditional stand cost will still have some relevance?

This question has been raised and discussed in a number of areas in which standards may feature:” Right decision making – It provides information to the operational staff, accountant and the management about the expected utilisation of production lines, machines, vehicles, cost, of all activities and raw material & standard processing time. Performance management the target of different individuals, are fixed if the performance is according to predetermined standards.

This standard can be used by managers as yardstick against which the performance of an organisation or department can be measured with this the management has no worries, the responsibilities are fixed and everybody tries to achieve his or her target and with hoe the are appraised Benchmarking standard costs are good yard stick for comparison between different plants at different locations standard develop for a production line in manufacturing company A can be compare with standard develop in another manufacturing company of the same production line.

Budgeting and planning It helps the management to prepare forecast for the rest of the year and sometimes more year’s e. g 5 years etc. The relevance of standard in Brittan and rest of the world Standard costing is arguably less relevant according to authors and professional in the accounting world this method is out dated and should be replace with more up to date method such as JIT TQM and ABC. The use of standard costing is relevant to an extends however the more current method are prefer and are widely used in most manufacturing company’s. Dr. Reef Lawson, IMA vice president of research and Professor-in-Residence; Jiliang Yang, retired professor from Hong Kong University of Science and Technology; and Pinzhun Ding, IMA senior China advisor, formerly of the PRC Ministry of Finance and the Chinese Institute of Certified Public Accountants (CICPA). These are the researchers that worked on the evolution of the finance and accounting (F&A) function in Chinese companies and management accounting technique (costing practice) they use.

The study found significant differences between the costing practices followed by most Western companies and those followed by Chinese companies. ” “It has been claimed that the use of standard costing is less expensive than an actual or normal costing system (Hilton et al. , 2003). Accordingly, standard costing has been widely used for both cost control and product costing purposes as well as to evaluate performance. Overhead Standard costing techniques do not include any overheads because standard costing always include elements for fixed overhead due to a larger percentage or the total cost of a product in manufacturing plants.

In this case, there are two ways of approaching overheads treatment when using standard costing in management reporting. “Whelden (1932) in the first edition of cost Accounting and actual overhead costing methods, simply record the over or under applied overhead as the difference between actual overhead cost and a standard charge to work in progress. ” In 1950 W Coutts Donald (CA,FCWA) used the innovation of calendar variance as part of the overhead volume variance.

The calendar variance was a self adjusting variance that allowed for the under or over absorption of fixed overhead cost due to the varying number of working hours or days in any given accounting period. Where the budgeted fixed overhead was broken down into twelve equal parts, the calendar variance was in effect and used to flex the fixed overhead budget. In this case on a later date it was analysed into expenditure and volume variance. The volume variance was then subdivided into capacity and efficiency or productivity variance.

Separate sets of overheads variances for fixed and variable overheads were also calculated. As mentioned earlier, the calculation of a calendar as part of fixed overhead capacity variance was probably the least understood of all variance. The Puxty and Lyall and Drury surveys show that 60% and 89% of respondents respectively, reported an overhead expenditure variance. Much lower numbers (28% and 41 %) reported an overhead volume variance. This could indicate a high level of use of a contribution approach in reporting system. 1) Overhead can be completely I ignored

Or (2) assumed to be fully absorbed by some cost drivers, these are the activities that consumes resources such as machine labour hours the mileage or the truck fleet etc. Conclusion The evidence showed that standard costing is less relevant in Britain because the country is more relying on service rather than manufacturing, The way standard costing as lasted over time also suggest how useful it has been and the alternative option such as TQM,JITand ABC could not replace the standard costing in the near at the moment.

It is well known among the social scientist that this process is less common and even less in the United Kingdom because of the lack of manufacturing output in all the sectors compare to other countries such as USA, China, Japan and Germany. The way the report set out it support the argument that standard costing is relevant but the threat of it being extinct is something that need to be considered, even though it as survived many years, it is inevitable that the other method will come into practice more often for the newer generation.

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