Essay: Analysis Of Standard Costing As A Management Accounting Tool.

Select two research-based journal articles relating to your selected topic in accounting. The journal articles need to study a real-life organisation (in any country), and its use of the management accounting tool related to your topic.

You are encouraged to choose the two journal articles from the following Accounting and Management Accounting Journals:

• Accounting, Auditing and Accountability Journal
• Journal of Management Accounting Research
• Journal of Applied Management Accounting Research

You are required to prepare a report about your findings from the literature research, and discuss how it has helped your understanding of your chosen topic.

Standard Costing

Over the last few years, manufacturing organizations have experienced both increasing technological advancement as well as high competition. With the tremendous variations taking place in a manufacturing setting, where the standard costing has been generally practiced, particularly due to upsurge in usage of the progressive industrial innovations such as the automation, ABC, standard costing and the JIT applicability of the standard costing has increased. The variations in manufacturing setting seemingly have increased importance of the standard costing particularly as the cost device technique. The report presents analysis of standard costing as one of the chief management accounting topic. To accomplish this, two studies related with standard costing were selected. Their similarities and differences were evaluated. The report also presents key lessons learned from these studies and their implication to management accountants working in Australia.

Standard costing was originally developed and founded as the cost accounting approach aimed at managing the cost control. Since its introduction in the early 1900s, standard costing has been broadly utilized by organization across the globe for numerous drives like budgeting, assessment of the stocks, charge decrease as well as cost control (Edwards, Boyns & Matthews 2002). In essence, standard costing has enlarged approval amongst different administrators as one of the most powerful cost control device since it permitted them hire the administration by some exclusion, a technique which examined just the most important deviations from the prearranged stages of the presentation and allotting their energies to areas which deemed beneficial (Holmes, & Hurley 2003).

Standard costing is also viewed as a management accounting tool used in enhancing capacity of an organization better meet its strategic goals and enable the company to compete worldwide (Bowhill & Lee 2002). Basically, standard costing is usually a performance review approach utilized in comparing the actual financial performance of an entity against standard performance for all levels of its operations. Such is accomplished through a comprehensive discussion with numerous departmental heads within an organization. Whenever the actual financial performance happens, actual financial information are then compared with the standard ones, and in case there is any difference in between the variables, such difference is usually evaluated in order to establish the reason for the variation (Sulaiman, Nik Nazli & Norhayati 2005).

Basically, this deviation is usually referred to as the variance and such variance might either be adverse or favorable. In other words, controlling of the costs comprises of provision of concise cut info or evidence on what cost ought to be incurred, the cost incurred and actual variance reported and what ought to have been reported, the reason and remedial action that ought to be taken in ensuring that actual activities are in line with planned activities (Bowhill & Lee 2002). As such standard costing is considered as the measure of the comparison for qualitative and quantitative values and is considered as the normal reference point of re-assessment of an organization’s financial performance. In other words, standard costing has been viewed as use and preparation of the standard cost as well as measurements at points of the incidence (Holmes, & Hurley 2003). It is concerned mostly with assessment of the efficiency that defines how organization’s management could control or could have power over acquisition and utilization of the capital in manufacturing specific amount of the output.

Different Forms of Standard Costing

Standard costing is the system of the management accounting that utilizes or deploys the concept of the predetermined costs relations to every component of the cost layout, overhead and materials for every line of its production. It therefore signifies integral portion of the management accounting control tool that would also entail responsibility accounting statements as well as the budgeting system (Holmes, & Hurley 2003). It is also referred to as the predetermined computation on how much costs ought to be under particular working conditions. In essence, the standard costing is built from evaluation of values of the costs component and correlates the procedural stipulations and quantification of labor, materials and overhead costs to wages and prices projected to apply within the period in which standard costs are anticipated to be utilized. In another study by Marie and Rao (2010), standard costing was highlighted as a crucial portion of the management accounting control that includes responsibility accounting and budgeting. According to the author standard costing might either be viewed from marginal costing approach viewpoint or from absorption costing viewpoint. Standard costing is relatively less expensive compared to a normal or actual costing system. Besides, it has been broadly deployed for both product costing and cost control purposes and in evaluating organization’s performance (Bowhill & Lee 2002).

Different forms of standard costing exists some of which include the attainable standard, ideal standard, material standard, current standard, labor and basic standards. Ideal standard are the established standard particularly developed based on maximum productive capacity of an entity. In other words, they are standard that are established without any provision of any negative aspect which might inhibit attainment of this standard (Edwards, Boyns & Matthews 2002). Current standards comprises of established standard on the basis of prevailing working setting within an entity. On the other hand, attainable standards are those standards premised on practicable aspects. Basic standards are the old established or designed standards aimed at satisfying specific goals. The labor standards are those standards that specify exact level or grade of labor used and time being involved. Finally, the material standards are usually derived from engineering and technical specifications and they comprises of the allowance for the inevitable and normal losses within a production process, evaporation, machining losses as well as projected level of rejections and breakages (Marie & Rao 2010).

Standard costing acts as the yardsticks against the actual or original costs (Edwards, Boyns & Matthews 2002). This implies that the standard costing offers relevant basis whereby financial performance of an organization might be evaluated based on what exactly to manufacture, how much amount to be utilized as well as projected activities that would be compared with actual outcomes. Further, standard costing offers the basis for frequent checks on amount of the expenses incurred during production. This offers some basis for frequent control and checks of the materials, labor costs, overheads as well as price use. It also offers readily available financial reports and quick information to enhance organization decision-making processes (Marie & Rao 2010).

Benefits of Standard Costing

Further, standard costing is a performance measurement tool. It is recognizable technique of appraising and monitoring organization’s financial performance via variance analysis, improving procedures and technique for future as well as evaluating the chief causes of the shortages. Standard costing is also considered as a management tool or motivation tool for employees (Abdullahj, Oni, Ahmeb & Shakur, 2015). Through creation of more realistic targets, the standard costing approach is said to create some more realistic targets which tends to motivate employees in accomplishing organization’s goals and standards which had been laid earlier. Standard costing is also said to assist in formulating the production prices prior to the period when products are manufactured. Further, standard costing offer the basis for forecasting and budgeting within an organization. It assists in tracking organizational internal issues with greater emphasis being placed to the likely prices. According to Marie and Rao (2010), standard costing is the most appropriate tool for resolving any internal issue that might arise from the inflation.

The two studies examined in this case is a study by Abdullahj, Oni, Ahmeb and Shakur (2015) on “Effects of standard costing on the profitability of telecommunication companies,” and a study by De Zoysa and  Herath (2007) on "Standard costing in Japanese firms". The study by Abdullahj, Oni, Ahmeb and Shakur (2015) is a journal of management review evaluating some of the special effects of the standard costing to productivity of the telecommunication firms. The study main purpose was to assess some of the impacts standard costing would have on profitability of the MTN telecommunication firms. The study also aims to examine how debt and costs issues are handled within MTN Telecommunication Company as well as how profitability was impacted by balancing stages of the non-current assets, current assets, non-current liabilities and current liabilities among others. The paper also purposed to examining profitability trends in telecommunication sector over a specific period in order to get informed decision to policy makers and investors. To achieve this, the study was guided by following research questions; one, what was the relationship that exist in between the standard costing and profitability of the telecommunication firms?, two, are standard costing being practiced and adopted by the MTN Telecommunication Company in Nigeria? Three, does application of the standard costing have significant impact on profitability?.

De Zoysa and  Herath (2007) on the other hand, aimed to evaluate standard costing in the Japanese organizations. Basically, the main purpose of this study was to review some of the past literatures regarding standard costing within the Japanese manufacturing setting. It assessed some over the variations experienced within Japanese manufacturing setting which are said to have lowered importance of the standard costing within these firms and examines current levels of standard costing applicability within Japanese entities.

Comparative Analysis of the Two Studies’ Findings; That Is, Their Similarities as well as Their Differences 

In a study by De Zoysa and Herath (2007), it was revealed that standard costing is still utilized by numerous organizations both in developed and developing nations. In fact, it was established that importance of the standard costing has never decreased to such low stage in spite of technological innovation.  It was also established that standard costing was still being utilized in Japanese manufacturing firms for diverse purposes in spite of its ostensible faults.

Standard Costing as a Motivation Tool for Employees

The study by Abdullahj, Oni, Ahmeb and Shakur (2015) established that standard costing had significant impact on profitability of any organization especially the telecommunication firms. In essence, it was found out that telecommunication firms benefit significantly through standard costing particularly in improvement of their profits.  Further, it was also established in the study that standard costing mostly enhances sufficient planning decision-making and control within an organization. It was also found out that standard costing helps the telecommunication firms in eliminating unprofitable operations, and products, and in enhancing better provision of cost control and costing information. It was also found out in the study that standard costing is the yardstick as it offers the key basis where organization’s financial performance might be evaluated based on the exact product being produced, quantity to be utilized as well as anticipated activities. In addition, the authors revealed that standard costing offer the basis for frequent checks on the form of expenses incurred during production. According to the analysis, it was stated that the system offer the basis for frequent checks as well as enhance easier control of materials, labor and overhead costs alongside with price usage. Furthermore, the authors established that standard costing is one of the most recognizable tools of appraising and monitoring performance via variances analysis as it assists in evaluating causes of the shortfalls during production and improving procedures and approaches used during production. It was also found out that standard costing produces some realistic targets in motivating employees to accomplish standards and goals which had been set earlier.

Based on the above analysis, it is evident that the two studies has some similarities. One, the two studies were dealing with evaluation of standard costing in manufacturing firms. Further, the two studies were similar in that they offered similar views on standard costing. Basically, in both studies, it was found out that standard costing is being applied in relatively large firms. In both studies it was found out that despite the tremendous technology changes, importance of the standard costing is still prominent and has not decreased. In fact, it was found out in both studies that standard costing is being utilized for numerous purposes in spite of it weaknesses.

Despite the above similarities, the two studies differed in their views at some instances. One, a study by Abdullahj, Oni, Ahmeb and Shakur (2015) revealed that standard costing is made with standard costing data which is obtained from an organization. This was not the case from De Zoysa and  Herath (2007) where there was no such findings at all. Secondly, Abdullahj, Oni, Ahmeb and Shakur (2015) found out that effective applicant of the standard costing had significant impact on profitability. Nonetheless, the other study did not examine such issues and therefore no such findings were established.

Outcomes or Lessons Learned from the Two Studies as well as How Useful They Would Be To Management Accountants Within Australian Companies 

Several lessons or outcomes can be depicted from the two studies. These outcomes are classified into two; that is, two lessons for each study explaining their applicability or impacts to management accountants within Australian firms. To start with, the first lesson learned in the study by Abdullahj, Oni, Ahmeb and Shakur (2015) was the fact that standard costing has significant effect on profitability of organizations. Basically, through this study, it is learned that standard costing are positively correlated with profitability. This means that standard costing influence how an organization generates profit. In essence, it is learned that standard costing helps in continuously assessing efficiency of an entity in profit generation. This concept is very important to the management accountants since it would help them in ensuring that their companies generate profits to enable them grow and survive in the business world. The concept gained from this study would help the management accountants within Australian firms to evaluate some of the expenses incurred and assess what needs to be done to reduce these expenses and instead maximize on their profit generation. Basically, the concept on standard costing being effective in evaluating profitability of an organization would be crucial to management accountants since it would help these professional to lay out future plans  and control measures; hence improving profit level of their organizations.

The second lesson that can be depicted from the study is the fact that standard costing provides the basis for regular checks. In essence, from this study, it can be learned that standard costing stimulates regular checks which are very important to any organization in controlling its material, labor and overhead uses during production. This lesson is very crucial for the management accountants within the Australian firms as it would help the in ensuring that the organization tract its material, labor and overhead costs usage over time. This is essential since they would be able to ensure that unnecessary costs are tracked and reduced. In essence, the concept gained from this study would help the management accountants in forecasting and preparing a budget.

On the other hand, in a study by De Zoysa and Herath (2007) it can be learned that standard costing applicability is still gaining prominent in spite of the tremendous advancement in technology. This concept is useful to management accountants within Australian firms since it helps them to understand better what standard costing is all about as well as its significance in the current business environment.

The second lesson that can be picked from this study is that standard costing remains key management accounting tool despite the weaknesses that are said to come with its application. The concept gained from this lesson would be important to management accountants concerned with the product costing in understanding importance of the standard costing. In addition, the study helps the management accounting to reveal or evaluate whether or not they should train their staff about standard costing.

Conclusion

To sum up, it is evident that standard costing is very crucial when it comes to profit generation. In fact, it can be concluded that the main idea why standard costing are implemented in manufacturing firms is to serve as the key technique for improvement of their profitability levels. This is based on the fact that the system is found to enhance better planning and control of the organization operations; hence, aiding in improvement of the organization’s profit level. Further, it can be concluded that standard costing has been broadly utilized by organization across the globe for numerous purposes such as budgeting, valuation of the stocks, cost reduction as well as cost control. Besides, it can be stated that standard costing is a crucial management tool which is deployed or used in enhancing capacity of an organization better meet its strategic goals and enable the company to compete worldwide. Basically, standard costing can be considered as the measure of the comparison for qualitative and quantitative values as well as the normal reference point of re-assessment of an organization’s financial performance. From the analysis of the two studies, it can be indicated that standard cost play a significant role in cost control as it is mostly concerned with assessment of the efficiency that defines how organization’s management could control or could have power over acquisition and utilization of the capital in manufacturing specific amount of the output.  It can also be indicated that standard costing play a significant role in profitability determination. This is based on the notion that it is positively correlated with profitability and therefore influences how an organization generates profit. It can also be indicated that standard costing offers relevant basis whereby financial performance of an organization might be evaluated based on what exactly to manufacture, how much amount to be utilized as well as projected activities that would be compared with actual outcomes and also offers readily available financial reports and quick information to enhance organization decision-making processes. Furthermore, it can be concluded that standard costing is a more recognizable technique of appraising and monitoring organization’s financial performance via variance analysis, improving procedures and technique for future as well as evaluating the chief causes of the shortages. This enhances more realistic targets being set up by an organization which in turns motivates employees in accomplishing organization’s goals and standards which had been laid earlier.

References

Abdullahj, SR, Oni, I, Ahmeb, MD & Shakur, FI (2015). Effects of standard costing on the profitability of telecommunication companies (study of MTN Nigeria). Arabian Journal of Business and Management Review (Oman Chapter), 5(1), 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, pp. 1-24.

De Zoysa, A & Herath, SK 2007, "Standard costing in Japanese firms", Industrial Management & Data Systems, vol. 107, no. 2, pp. 271.

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, pp. 12-45.

Holmes, DS & Hurley, RE 2003, "How SPC Enhances Budgeting and Standard Costing-Another Look", Management Accounting Quarterly, vol. 5, no. 1, pp. 57-57+.

Marie, A & Rao, A 2010, "Is Standard Costing Still Relevant? Evidence from Dubai", Management Accounting Quarterly, vol. 11, no. 2, pp. 1-10.

Sulaiman, M, Nik Nazli, NA & Norhayati, MA 2005, "Is standard costing obsolete? Empirical evidence from Malaysia", Managerial Auditing Journal, vol. 20, no. 2, pp. 109-124.