Understanding Standard Costing: Purpose And Applicability

What is Standard Costing?

Explanation of Standard Costing 

Standard costs usually reveal objectives, spur some actions and offers controls and check such that some exceptional income oriented objective performance could be accomplished and consequently, enough punishment could be exercised for any bad performance (Rao & Bargerstock 2011). In essence, standard costs result in appraised being made over the production facilities and from the management capabilities and intention and is considered as the first step in weakness and strength appraisal. Standard costing is the management accounting tool for either improving profitability or managerial effectiveness of an organization or not (M?rginean 2013). Unlike other tools, the system deals with calculation of significant information regarding an organization. In other words, standard costing as one of the longest established concept is considered as the management function of control and planning. It is the process of that is used in estimating cost of a product per unit (Edwards, Boyns & Matthews 2002).

 Further, standard costing is usually the management accounting tool which some manufacturers utilizes in identifying variances and differences between actual costs of goods produced and cost which ought to be incurred in producing these goods (DeZoysa & Siriyama Kanthi Herath 2007). Cost occurring for actual product output is the standard cost. It is usually integrated with the manufacturer’s budget for accounting period and comprises of product costs, overheads and direct materials. With the standard costing, accounts for the inventories as well as for COGs comprises of standard costs of input which ought to have been utilized in producing actual product output (Rao & Bargerstock 2011). Further, standard costing is the routine assessment approach utilized in comparing the real enactment of a specific firm against its standard for the entire section of its operations (brahim 2007). In this case, whenever actual performance happens, actual data or information is compared with the standard ones and in case of the difference, this difference is usually analysed in order to establish the main reason thereof. Difference of the actual value from the standard one is referred to as the variance (Abdullahj, Oni, Ahmed & Shakur 2015). This variance might be adverse or favoured.  Standard costing entails provision of clear information or explanation on what amount of cost ought to be incurred, the actual amount of the cost incurred, variance between the amounts that ought to be and amount incurred, reason and remedial action that ought to be undertaken in ensuring actual occurrences are in line with planned ones. Besides, standard costing is the degree of association for qualitative and quantitative ideals. It is the regular allusion level for re-evaluation of an organization’s concert (Edwards, Boyns & Matthews 2002). Besides, it is viewed as preparation and utilization of the standard cost as well as measurement at a point of incidence. The system is usually concerned with evaluation of organization efficiency, describing how organization’s managers could have significant management over procurement and utilization of the capitals in manufacturing specific class of the yield (Abdullahj, Oni, Ahmed & Shakur 2015).

Purpose and Benefits of Standard Costing

According DeZoysa and Siriyama Kanthi Herath (2007) to standard costing is viewed as the system of management accounting that utilizes prearranged costs in involving every component of the cost arrangement, overhead and materials for every line of the lendered services or produced product. It therefore represent integral portion of the management accounting control approach that would also include responsibility accounting statement and budgeting system. To be more specific, standard costing is considered as predetermined calculation of amount of cost that ought to be placed under particular working conditions (Abdullahj, Oni, Ahmed & Shakur 2015). This is built from evaluation of value of the cost component and relates approach specifications as well as quantification of the labor, material as well as other charges to the prices projected or estimated to relate within the date that standard costs were projected to be utilized. According to Rao and Bargerstock (2011), standard costing might either be considered from viewpoint of the marginal costing viewpoint or on absorption costing viewpoint. Concerning the standard costing approach with the marginal costing, variances would be unveiled on total pertinent cost of the products eliminating the fixed overheads. Though if observed in perspective or viewpoint of the absorption costing, the amount of variance would entail total costs of the products (Radu M?rginean 2013).

Standard costing is believed to assists organization management in planning for the future operations (Edwards, Boyns & Matthews 2002). Standard costing acts as the yardstick since it offers basis whereby the performance of an organization might be evaluated based on what product should be produced, quantity to be used as well as the projected level of the activities. Standard costing offers basis for regular checks on the amount of expenditure incurred during production (Marie & Rao 2010). In essence, it provides basis for regular controls and checks of material, labor costs, overhead expenses and price usage. It offers readily available and fast report for the management decisions. Further, standard costing enhances cost reduction and cost control. In this sense, by comparing the standard cost with the actual ones, cost could be reduced and controlled via constant monitoring measures and comparing the outcomes (M?rginean 2013). It is a recognizable technique of appraising and monitoring performance via variance analysis, improving procedures and method for future and analysing the causes of the shortfall. Standard costing also offer the basis for forecasting and budgeting and assists in tackling the internal issues with a lot of emphasis being provided to probable price variation (Bowhill & Lee 2002). It is also the most suitable management accounting systems in resolving internal issues arising from the inflation.
Purpose of the Two Studies

Applicability of Standard Costing in Different Settings

The article “Effects of Standard Costing on the Profitability of Telecommunication Companies” by Abdullahj et al. (2015) on standard costing and its influence on profitability of the telecommunication companies with the main focus on MTN Telecommunication Company in Nigeria. Its main purpose was to assessing impacts of the standard costing approach on MTN telecommunication firms’ profitability in realizing or ascertaining whether its applicability have any impact on the profitability, in exploring relationship between profitability and standard costing of the telecommunication firms and ascertaining whether the standard costs and the values being practiced and adopted by the MTN Kona telecommunication company.  It also aimed at exploring profitability trend within the sector tin inform the decision making by policy makers and investors.

On the other hand, “Exploring the role of standard costing in lean manufacturing enterprises: a structuration theory approach” by Rao & Bargerstock (2011), is a journal trying to evaluate

Or explore role of the standard costing in the lean manufacturing organization. Though manufacturing firms across the globe are moving swiftly to adoption of the lean manufacturing technique, there is some evidence that some continue using the traditional standard costing systems despite the argument that the systems higher the lean execution. Nonetheless, it is known that there has never been any study examining or determining whether the lean accounting matches with standard costing. As such the purpose of this study was to examining how mature the lean manufacturers’ utilization of the standard costing is compared to the lean accounting theories. The paper also purposes to determine the reason why the mature lean manufacturing might continue using standard costing.  This was in anticipation that the study would result in better comprehension of the main reasons the lean manufacturers tend to retain the standard costing and facilitating aspects which permits some firms in discarding the standard costing as their control systems for their operations.

Similarities and Differences in the Findings of the Two Studies

In an article by Rao & Bargerstock (2011) it was found out that the standard costing produce comprehensive scheme of the accounting for reporting all transactions within a lean manufacturing process to hint flow of every course through diverse levels of production. Besides, it was found out that in single-product, standard costing would be relatively easy for maintaining and producing meaningful information for control. Furthermore, the authors in this study established that in multiproduct lean manufacturing setting, where every process is expected to produce wide range of products, and maintaining detailed accounts of the products is both cumbersome and wasteful.  Hence, the use of the standard costing in this setting is revealed to produce volume of the variances report which might not just be hectic to analyse but also not offer meaningful info in exercising control.  Further, Rao & Bargerstock (2011) found out that in a lean manufacturing process, possibility of utilizing standard costing in controlling purposes would be relatively high.  Further, it was established that in the lean manufacturing organization where little support is offered from the top management, probability of using standard costing for control would also be relatively high.  Nonetheless, in a lean manufacturing process where management are preparing specialized reports in capturing financial effect, possibility of retaining the standard cost would be very low.

Two Studies on Standard Costing: Impact on Profitability and Performance

Abdullahj et al. (2015) in their study found out that standard costing had a significant impact on profitability of telecommunication firms. In fact, they revealed that standard costing was significant in each and all telecommunication firms operating in Nigeria. In fact, they established that in case, practice and principles of the standard costing were practiced and adopted in the MTN Kano Company, this could serves as the management accounting approach for upgrading of its productivity. This was based on their arguments that standard costing augments effectual planning, decision-making and control within the firm. On overall, the authors of the study supported general overview that standard costing helps in upgrading profitability levels within the manufacturing firms.

The two articles were similar at some point especially in their findings. For instance, both articles support the general conclusion about standard costing indicating that the system helps in improving profitability within any manufacturing organization. Besides, in both studies, standard costs were found to have been developed in suiting needs of the mass manufacturers. This is based on the notion that the gains of economic scale, the high fixed outlay expense are usually outlined across sizes of the units being created. Furthermore, the two standards were similar in that their findings regarding standard costing was relatively same. For instance, in both studies, standard costing is established as a expedient means of the costing outputs within the bulk manufacturing settings. The authors in both studies argued that standard costs helps in estimating costs of output on unit basis which are then compared with the actual costs in order to determine amount of variance. Both studies also established that standard costing create detailed systems of the management accounting for reporting all transactions in order to hint movement of the procedures all through diverse levels of manufacture. Additionally, in both studies, in single-product environment, the systems is said to be relatively easy to uphold and could produce some expressive reports for the controls.

There is no meaningful difference between the two studies except that they had varying few in regard to a lean manufacturing setting where Rao & Bargerstock (2011) established that in multiproduct lean manufacturing setting use of the standard costing to produce volume of the variances report which might not just be hectic to analyse but also not offer meaningful info in exercising control. There is also a different in their views where Rao & Bargerstock (2011) which was analysing applicability of standard costing in a lean manufacturing environment established that in such a situation where the management fails to offer support, applicability of the standard costing might be relatively low and a bit costly for the firm.

Outcomes or Lessons Learned From the Two Studies

The outcomes of the two studies would be discussed separately starting with outcomes or lessons learned from a study by Abdullahj et al. (2015) followed by outcomes or lessons learned from Rao & Bargerstock (2011). Basically, two outcomes or lessons learned from each study and their impacts on the management accountants professionals working in Australia are discussed in this section brings into  a total of four main outcomes.

In a study by Abdullahj et al. (2015), it can be learnt that standard costing is widely or broadly utilized within Nigerian Manufacturing firms and was found to enhance adequate planning, decision-making and control processes within an organization. This is a good lesson for management accountants working in Australia as they prepare catch up with the every growing development in management accounting techniques. Basically, this lesson is of greater help to management accountants since they would be very keen while using the standard costing in their planning, control and decision-making. In fact, it would enable them to act very smart in ensuring that the standard costing is fully implemented in their operations and that everything that is required to ensure its successful operations is put in place.

Through a study by Abdullahj et al. (2015) it can be noted that standard costing helps in elimination of the unprofitable products, cost control and in provision of the cost information. The outcome is of greater importance in my studies and in management accounting professionals working in Australia. This is based on the fact that knowing very well that standard costing helps in elimination of the unprofitable products and in controlling costs of production, the management accountants would be strive in highlighting such benefits to their organizations’ executives which would in turn work towards implementation of the systems.  Besides, with such lesson, the management accountant would not be reluctant in implementing this system in their organization in order to be able to control any cost associated with their production and to cut or remove any unprofitable products in their production.

In a study by Rao & Bargerstock (2011), it can be learnt that due to its affordability, flexibility and simplicity, standard costs is one of the most favourite management accounting technique amount the finance and accounting professionals both in service and industrial sectors. Such lesson is of greater sense to every management accountant working in Australia. This is because it would enable them understand that in spite of the benefits highlighted regarding standard costing, there is need to be very cautious while using this system since if caution is not practices or observed they might end up making bad decisions. Furthermore, they would be very eager to practice management accounting in all levels of their production since through the study, they understand the flexibility nature and simplicity nature of the standard costing.

Further, in a study by Rao & Bargerstock (2011) it can be learned that standard costing in lean manufacturing setting possibility is high. This is based on the fact that in multiproduct lean manufacturing setting use of the standard costing to produce volume of the variances report which might not just be hectic to analyse but also not offer meaningful info in exercising control. Such lesson is good and would influence the management accountants working in Australia to be very keen to understand a scenario of lean manufacturing and probable measures to ensure successful outcomes through the use of standard costing.

Conclusion:

In conclusion, standard costing is widely or broadly utilized within manufacturing firms. It can also be stated that the system enhance adequate planning, decision-making and control processes within an organization and also helps in eliminating unprofitable products, cost control and in provision of the cost information within an entity. Due to its affordability, flexibility and simplicity, standard costs is one of the most favourite management accounting technique amount the finance and accounting professionals both in service and industrial sectors. It can also be concluded that despite the two studies having some differences in their opinion regarding standard costing, standard costing stands out as the most convenient system in management accounting as it helps in improving profitability within any manufacturing organization. Besides, it can be concluded that standard costing is suitable means of the costing yields within the mass manufacturing environment as it create detailed systems of the management accounting for reporting all transactions in order to hint movement of the procedures all through diverse levels of manufacture. Therefore, there is need for relevant bodies of management and executive to enhance or implement standard costing practice in their organization to improve on their control and decision-making as well as to enhance better management of their cost of productions. Besides, there is need for the management accountant especially in Australia to embrace this concept of standard costing which is in turn expected to help them in improving their organization profitability through adequate planning and control processes.

Management accounting and cost accounting combines in providing relevant accounting information to assist organization’s management run their operations in an effective manner. Besides, at the heart of economic success and financial performance stability of a particular firm, that in itself displays quality of the decisions made by the managements, there is need to enhance better management accounting approaches (Abdullahj, Oni, Ahmed & Shakur 2015). Further, in spite of inadequacy of detailed research in accounting records, as well as how the resources were utilized in informing the decision-making, a conventional wisdom has developed directed at inadequacy of the costing information for the decision-making, non-adoption by the company of the best practices and failures of the management accountants in providing lead in construction of a better costing systems (DeZoysa & Siriyama Kanthi Herath 2007). Basically, utilization of the management accounting assists in application of principles of the scientific management in the business operations liked with adoption of the budgetary control and standard costing (brahim 2007). As such the paper aims to present analysis of one of the key topic in management accounting; that is, standard costing. It begins with explanation and description of the standard costing. This is followed by selection of two research journals on the study topic; that is, standard costing, highlighting their purposes and the research questions guiding them. The paper also presents similarities and differences between the two studies followed with analysis of two main outcomes or lessons learned from each article presented and their impact on the management accountants working in Australian firms. It wrap with concluding statements explaining what was established regarding the topic.

Reference:

Abdullahj, SR, Oni, I, Ahmed, MD & Shakur, F (2015), ‘Effects of Standard Costing on the Profitability of Telecommunication Companies: Study of MTN Nigeria. Oman Chapter of Arabian Journal of Business and Management Review, 34(2611), 1-8.

Bowhill, B & Lee, B (2002), ‘The incompatibility of standard costing systems and modern manufacturing: Insight or unproven dogma?’, Journal of Applied Accounting Research, vol. 6, no. 3, p. 1.

brahim, AK (2007), ‘The practice of standard costing systems in Syrian public companies?: an exploration for the impact of institutional, technical and intra-organizational factors?: set-theoretic approach.

DeZoysa, A & Siriyama Kanthi Herath (2007), ‘Standard costing in Japanese firms’, Industrial Management & Data Systems, vol. 107, no. 2, pp. 271–283.

Edwards, JR, Boyns, T & Matthews, M (2002), ‘Standard costing and budgetary control in the British iron and steel industry A study of accounting change’, Accounting, Auditing & Accountability Journal, vol. 15, no. 1, p. 12.

M?rginean, R 2013, ‘The Cost Management by Applying the Standard Costing Method in the Furniture Industry’, SEA: Practical Application of Science, vol. 1, no. 1, p. 97.

Marie, A & Rao, A (2010), ‘Is Standard Costing Still Relevant? Evidence from Dubai’, Management Accounting Quarterly, vol. 11, no. 2, p. 1.

Radu M?rginean (2013), ‘The cost management by applying the standard costing method in the furniture industry-Case study’, SEA: Practical Application of Science, Vol I, Iss 1 (1/2013), Pp 97-105 (2013), no. 1 (1/2013), p. 97.

Rao, MHS & Bargerstock, A (2011), ‘Exploring the role of standard costing in lean manufacturing enterprises: a structuration theory approach’, Management Accounting Quarterly, no. 1.