This is the technique of costing wherein the expected cost for a product is compared as against the actual costs that have been recorded and the variances if any, are recorded for the purposes of controlling these costs and the apt actions are then undertaken so that the future costs could be controlled. This is the approach which is further simplified and which shows in the difference between the expected and the actual costs and also some of the other alternatives include FIFO, LIFO methods. In this, a huge amount of historical cost information has to be maintained for all of the stock items held in the inventory.
The technique includes the creation of some of the estimated or the standard costs for a few of the activities that takes place inside the organisation. The main reason for the same is the fact that there are a number of different applications which is too time consuming to collect in the actual costs and hence, this technique is sued since it saves time.
The standard costs are usually higher than the actual costs, these costs helps in the calculation of the variable that would break in into difference and these are caused by the factors such as the changes that takes place in the wage rates, the cost of the materials etc. the cost accountant has the responsibility of changing these standard costs and bring them in line with the actual costs that are being incurred.
The following are the advantages of this system:
Almost all of the companies does have budgets and they use the calculations using the standard costs in order to quote for any specific customer received by them and lay down the profit that they could earn in the near future. This would help them in assessing in the actual performance as against the expected performance.
The following are the issues that are encountered with by following this technique:
The following are the variances that pertains to the standard costs:
Therefore, in the nutshell, variance is either in the price that has been paid for it or is the variance in the quantity that has been purchased.
Explanation of the purposes of the Articles:
The main aim of the first article is to examine and illustrate in the scenario of this technique in the listed pharmaceutical and chemical industry in Bangladesh. Another aim of this study was to understand the reasons for which the old costing system is still being used in this sector. The study talks about the reasons to why the old technique is still being used which is the traditional costing method when the new technique has already been introduced such as the ABC< Lean manufacturing, six sigma etc. then the importance of the various different functions of standard costing have been investigated in this study.
In respect of the second article, there have been many of the tools such as activity based costing, the balance scorecard and the target costing system that have gained some importance in the business community. The traditional accounting technique prevails in practise. The main aim of the second article is the examination of the use and the relevance of the system of standard costing used at the Swedish manufacturing company SKF and also provides in the ways through which the system could be improved. The study states the areas wherein this technique could be improved.
Analysis of the findings:
Article 1: Toward Understanding the Complexities of Service Costing: A Review of Theory and Practice (taken from Journal of Applied Management Accounting Reserch):
This article talks about the Pharmaceutical and the chemical industry in the country of Bangladesh which is one of the most important sectors in the economy. It counts for 97% of the total requirements of the medicines and employs about 115,000 employees in them. There are about 100 companies that produce various different chemicals in the country but the number of listed companies are only 28. This study focusses on those companies only. The study found that about 75% of these companies were using the standard costing for various different purposes.
This shows the fact that even when there have been many changes and even when a number of new methodologies and techniques have been introduced into the system, even then the old techniques do not fail to appeal to these companies. And the main reason behind the same is the fact that this old technique is simple when it comes to being used. When inquired about the reason as to why the companies use the standard costing, all of the companies mentioned that it controls costs and also helps in placing cost to the inventory. It further helps in budgeting.
When asked about as to the types of standards that have been sent in by these companies, they replied that they help in attaining the standards and also sets in the currents standard and 14% stated that they set in the ideal standard and only 10% sets in the basic standard.
Whether the company’s chose to use the design or the engineering studies, the companies does favour in the historical usage of the stated method. When asked about the frequency of reviewing these standards, there were many of the heterogeneous responses. About 28.725% stated that these were reviewed on quarterly basis and about 23.81% of the people stated that the changes in the economic as well as in the business conditions. About 14.28% of the people review these standards on an annual basis and 9.52% of the people review in these standards on a continuous basis and some of the reviews these twice in a year.
The study further states that the operating factors were the main factors that led to the emergence of the variances. There were many of the random factors which include the poor recording of the costs and the poor budgeting as being the reasons for the emergence of the variances. The majority of these companies use the material price and the quantity variances along with the variance of the sales volume and the price variances and then a very few use the variable and the fixed manufacturing overhead. Then the smallest number of companies use the labour rate and the efficiency variances for their reporting. Then the material mix and the yield variance is used by the minimum number of companies. The study states that the size of the variance is the most apt factor when it comes to investigation of the variance.
Some of the companies stated that they often use the combination of the various factors along with the various other practise which is not consistent. There are a number of disadvantages of using this technique that often pose a question of its continuous adoption in the modern manufacturing environments.
The standards set in the managed often and very quickly become outdated as the internal operating conditions and the external environmental changes frequently. There is an increased amount of automotive operations, bypassing of the continuous improvements accompanied with the lack of the detailed data that was also reported in by these companies as being the major disadvantages of the standard based costing.
In the nutshell, from the above it could be concluded that the new techniques such as the Lean, six sigma has not appealed in to these companies in the industry of Chemical and Pharmaceuticals in the country of Bangladesh. And it is due to this reason that these companies are still going for the standard costing system (Elsie, 2013).
Article 2:
what kind of activity based information does your purpose require: International Journal of Operations and Products management?
In this, the study is based on only 1 company which is the Swedish manufacturing company SKF. It is the leading producer of ball bearings. The company uses the standard costing system which is very much available each and every level of the entity. The company has implemented many of the guidelines with relation to costs that have to be followed on timely basis. Many of the people are responsible for this system and hence have received signals with regard to the guidelines that have not been used as was intended. There was a suspicion that the information of the standard cost is somewhat not suitable and is not being following correctly.
It is due to the following reasons that this technique is being used:
In the nutshell, this system of standard costing is very much helpful and it proves down its superiority and usefulness. Though there are many of the disadvantages that it suffers from but still the advantages or the benefits outlay the disadvantages.
Both of these Articles talk about the use of the standard costing system in their companies.
The following are the 4 lesson learnt in respect of the topic:
The outcomes that would be useful for the Australian companies are as follows:
References:
AccountingCoach.com. (2018). What is standard costing? | AccountingCoach. [online]
Automationworld.com. (2018). Proper Use of Standard Cost Methods Enhances Efficiency | Automation World.
Bragg, S. and Bragg, S. (2018). Standard costing.
Courses.lumenlearning.com. (2018). 8.4 Advantages and Disadvantages of Standard Costing | Managerial Accounting.
Deltek.com. (2018). Standard Costing and Variance Analysis.
Learn Accounting: Notes, Procedures, Problems and Solutions. (2018). Standard Costing: Meaning and Objectives | Cost Accounting.
Borjesson, s. (1994). What kind of activity-based information does your purpose require?.
Elsie, c. (2013). Toward Understanding the Complexities of Service Costing: A Review of Theory and Practice.
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