Standard Cost Accounting System: Advantages, Disadvantages, And Journals Essay.

1. You are to choose one management accounting topic from the list below for this assignment, and register your chosen topic with your lecturer in class or via email before commencing the assignment.

2. Select one topic only:
Activity-based costing (ABC)
Budgeting
Standard Costing

3.Select two research-based journal articles relating to your selected topic in (1). 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 Accounting and Management Accounting Journals:

Assignment Requirements:

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. The report should cover the following:

1. An explanation of the selected management accounting topic.
2. An explanation of the purpose of the two studies and what research question(s) they set out to explore about the topic.
3. A discussion about the similarities and differences in the findings of the two studies.
4. Provide four (4) specific outcomes or lessons learned from the two studies’ research findings that will be useful for management accountants in Australian companies to learn from, and justify your answer [i.e. provide 2 outcomes from each study].

Advantages of Standard costing technique

The system of cost accounting bears great significance in the smooth functioning of the business of every organization. Various methods of cost accounting are in practice and every organization adopts that method of cost accounting which is most suitable for its business. We in our report will be discussing about one method of cost accounting, which is Standard Cost accounting system. Standard costing is a very renowned method of cost accounting and is being practiced by many organizations in different industries (Linden & Freeman, 2017). Standard costing helps the management of an organization in improving the standards of various cost centers in the organization by comparing the actual cost incurred as recorded in the books with the expected cost which is set by the management for achieving higher profits. The differences between the actual cost and the expected cost are called variances. Some examples of variances are price variance, material mix variance, labor efficiency variance, etc. Different variance helps the management in analyzing different aspects of costs related to different department.  With the help of such variances the management can figure out who is responsible for which cost variance in case of both favorable and unfavorable variances. A report is prepared after evaluating each variance and the same is presented to the management for assessing the results in order to find out whether the target set was achieved and if not then assess the fault was in planning or whether it was in the proper execution of the plans (Goldmann, 2016). This helps the management in proper correct decision making. In this assignment we have discussed in detail the objective, significance, merits and shortcomings of the standard cost system of accounting in depth. We have analyzed the various aspects of this system of accounting method with the help of two journals. All the important points were noted and then reported after studying the journals and the outcome of the same has also been mentioned below.

The standard cost technique has various advantages, these advantages are as follows:

1. It supports in the constant evaluation of performance of the staffs of an organization by calculating the variance like planning variance, etc. ,
2. It assists the management in planning by supplying different ways for the proper utilisation of labour and material along with the overheads which are economic in nature. The management, for the standard costing to be effective, must plan for economic and efficient operations,
3. The technique of costing helps in detecting the inefficiencies in the costing system by analysing the variances(Choy, 2018),
4. As the standards of a product are fixed by the management in advance along with the related materials and components, the overall efficiency of the production system is improved which results in reduction in cost and higher profit margin, which is the main objective of the management,
5. Implementation of standard costing is a onetime process and once it is implemented most of the works related to cost will be eliminated and thus it helps in saving cost,
6. It results in effective delegation of authority as well as responsibility as it sets standards for each cost centres and as a result the supervisors and executives of the respective cost centres will know the standards that they are required to maintain.
7. The adoption of standard cost system of accounting helps the management in coordinating different functions of an organization like research, accounting manufacturing, engineering and marketing for the achievement of common goal of the organization. The targets should be properly defined and communicated to the staffs while setting the standards for attaining the goal(Belton, 2017).
8. The most significant objective of any system of cost accounting is cost reduction and cost control and the same objective has been duly recognized by the standard cost accounting system. Cost control involves producing the product with the quality as required but at lowest cost possible. These standards help the management in making comparisons of the standard cost with actual in order to maintain control over costs by highlighting the activities which do not confirm the standard and those which exceed the standard.

Besides the advantages enjoyed by this technique of costing, there are certain number of disadvantages which this system of costing faces. These demerits are discussed as follows:

1. Standard costing turns out to be more costly as expected. Although the implementation of standard costing is onetime process but it requires to be revised on continuous and timely basis. As a result, it may end up proving to be tedious and time consuming.
2. No matter how advantageous this system of cost accounting proves to be, the time, cost and skill involved in its implementation renders it unsuitable to be adopted by small companies(Alexander, 2016).
3. Standard costing are best suited for those types of industries which are engaged in the production of standardized goods. It is not suitable for those industries producing non standardized products.
4. The standard cost accounting system is useless in case of the modern factories which has adopted the principles of Just in time approach.
5. The standard costing technique only controls the operating system of an organization, totally ignoring other important factors like quality, customer satisfaction, service, etc.

In this report, we have discussed two journals relating the standard cost accounting system. The first journal is “Why Traditional Standard Cost Systems are Not Effective in Today’s Manufacturing Environment” by Baker, William M and the second one is “Redesigning Cost Systems: Is Standard Costing Obsolete?” by Carole B. Cheatham and Leo R. Cheatham.

The first journal is based on the author’s reasons behind the ineffectiveness of the standard cost accounting system in the current manufacturing environment while in the second journal the author has considered the standard costing system as obsolete and emphasized on the reasons for the outdating of the standard costing system and how should it be redesigned. These journals are discussed in a comprehensive manner below.

In the first the journal the author has discussed about the changing use of cost accounting system in the manufacturing environment of today’s world. However, the standard cost accounting that is followed is still traditional. Technology has changed to great extent which has resulted in the development of goods which are new and superior in a short span of time. With this swift improvement and development in technologies the traditional standard costing system is unable to keep up (Baker, 1989). The main problem in front of the industrial managers is the inability of the standard cost accenting system to measure the inefficiencies in the production process in time. This has led the managers to look for alternate approaches. The main question is why the traditional standard costing system is unable to work in today’s manufacturing environment. The author has analyzed the reason behind this statement. The author has discussed in his journal that the product life cycle has a great impact on the cost accounting system (Meroño-Cerdán, et al., 2017). There are four stages in the life cycle of a product. These are introduction, growth, maturity and decline. The above question relating to the traditional standard costing system can be answered by studying the life cycle of a product. The life cycle of a product can vary from days, in case of some products, to decades in case of others. The system of cost accounting at the time of introduction and growth stage of a product significantly affects the product’s life cycle (Cheatham & Cheatham, 1996).  Many products, today, becomes obsolete before reaching the maturity stage and declines. These two stages, maturity and decline affect the standard costing system. More emphasis is put in the system of standard costing by the managers when the product is in introductory and growth stage. Once the product reaches stability, the managers neglects the standards being followed, whether are appropriate or not and any revision has been done. This makes it more important to oversee the standards at the last two stages of a product’s life cycle to ensure that the standards followed are not outdated. As a product reaches the maturity stage the standard costing system becomes less volatile. There is plenty of time with the management and the staff to learn and improve the production process. At this stage the standard cost can help in detecting the operational inefficiencies in the production system with more ease. At the maturity stage the standard costing attains stability. The standard costing is very useful in the manufacturing industries which follow the tradition product life cycle approach but only until the maturity stage (Mun, 2018). However, in the current environment with increasing competition the product become obsolete before the maturity stage, only those products which survive to reach this stage, are the cases in which standard costing can be used. Unfortunately it is not possible to wait till the maturity stage for standard costing to be effective. These days the competition is so acute with so many manufacturers trying to produce the same product more economically to reduce the cost and with greater quality. And by the time the manufacturer becomes successful in making such product, the product already becomes outdated. In such circumstances, the standard cost accounting technique does not even get a chance of being applied. There are, though, several steps that can be followed in order to keep the standard cost accounting system in operation, like learning curve analysis, understanding of various cost approaches like JIT, identification of cost changes and cost drivers.

Disadvantages of Standard costing technique

The second journal indicates on the question that whether the standard cost accounting system has become obsolete and also on the measure to redesign it. The author has discussed that the advanced manufacturers have been complaining about the inability of the standard cost accounting system to provide proper and reliable information since 1980s. As per the survey done by Schiff in 1993, it was observed that standard cost accounting system is being used by majority of people. The author has listed the areas under the traditional standard costing system in which updating is required and on which the new manufacturing environment mainly focuses (Naci & Hasan, 2012). The concerns mainly are on the variances like; firstly, variances pertaining to raw materials, there are cases where the raw materials ordered differ from the materials delivered by the suppliers. This causes an unfavorable variance in raw material. The raw material variance basically showcases the effectiveness of the supplier. The favorability of the variance depends upon the quantity of raw materials delivered. Secondly, the variances pertaining to material inventories and efficient use, the purpose of this variance is to reflect whether the quantity of material purchased is optimum, that is to say, only that much quantity should be purchased which is required to avoid any inventory buildup, which will cause an unfavorable variance. The efficiency variance on the other hand reflects the difference between actual quantity of material used and the standard quantity which was required for the production. Thirdly, variance pertaining to productions level and quality, the quality variance indicates that whether the actual quality of the product produced meets the standard quality set by the management (Dan, 1995). The production variance shows the difference between the actual production cost and standard production cost. The aim of the modern manufacturing industry is to produce only that much what is required to meet the sales order. Lastly the variance pertaining to sale analysis, the sales variance reflects the service to customers and the cost of the sales lost. This variance is the difference between the actual sales and the budgeted sales. The variance is favorable when the actual sale exceeds the budgeted sale. The author has also set out several methods to be followed for updating the traditional system of standard costing. Some of these are: the use of prior period results as standards, use of benchmarking, using target cost, etc. the responsibility of updating the system of cost accounting lies with the management. The management is required to constantly study and revise the standards in order to keep it updated.

The similarities between the two studies given below:

1. Both the case studies highlights on how the standard cost accounting system is getting obsolete and sets out the reason behind this.
2. Both the authors have, in their journals, have laid down several methods for updating the traditional system of standard costing.
3. Both the authors have presented the journals in the context of modern manufacturing industries(Naci & Hasan, 2012).

The differences between the two case studies are as follows:

1. In the first case study, the author has discussed about the problems in using the traditional system of standard cost accounting using the product life cycle while the author of the second case study has focused on the issue relating to the different variances.
2. While the author of the first case study has presented methods of improvement in context of production of a commodity, the other has laid down the steps for improvising the standard cost system for a company as a whole(Saeidi, 2012).

There are number of things which can be learned from the discussion of the above two case studies. Some of the points that merit our attention are being discussed as follows:

1. In case of manufacturing industries, the life cycle of a product must be thoroughly studied in order to identify the time span of each stage in advance for the application of the standard cost accounting system.
2. The cost drivers should be identified in an early stage for the purpose of controlling the cost using standard costing as new products are tend to get outdated quickly in the fast growing environment(Vieira, et al., 2017).
3. In the later stages of the product life cycle in the manufacturing industries the standard costing system is unable to detect the inefficiencies in the operation; the management should understand the importance and efficiency of JIT philosophy.
4. The management should recognize and account for the learning curves to identify the efficiency of the labour force. Moreover they should also differentiate between the fixed cost and variable costs.

The key points observed in the second case study which might be useful for the Australian companies are as follows:

1. A simple way to have a dynamic standard costing system is to use the standards laid down by the management in the past period(Bumgarner & Vasarhelyi, 2018).
2. Use of target costing or benchmarking system can prove to be useful for enhancing the standards of costing. Moreover, the management of the company is required to constantly review that the standards are appropriate.

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Baker, W., 1989. Why traditional standard cost systems are not effective in today’s manufacturing environment. Industrial Management,, 31(4), pp. 22-24.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory and Application, 20(1), pp. 7-51.

Cheatham, C. & Cheatham, L., 1996. Redesigning cost systems: Is standard costing obsolete?. Accounting Horizons, 10(4), p. 23.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Dan, S., 1995. The benefits of activity-based cost management to the manufacturing industry. Journal of Management Accounting Research, Volume 7, p. 167.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, pp. 1-15.

Mun, K. a. S. I., 2018. A close look at the role of regulatory fit in consumers’ responses to unethical firms.. s.l.:s.n.

Naci, T. & Hasan, O., 2012. The Measurement and Management of Unused Capacity in a Time Driven Activity Based Costing System. Journal of Applied Management Accounting Research, 10(2), pp. 43-55.

Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran. African Journal of Business Management, 6(23), pp. 7031-41.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).