There is various type of costing methods that the companies can apply for their operations. Out of these various methods one of such method is standard costing. It works based on comparison between the actual and the standard and shows where the company is lacking when both are compared. The variance between the given costs are taken as a point of analysis for the management of the company and based on that they take important decisions. It helps manufacturers in understanding the variances between the actual good cost and the expected cost of the goods produced (Axelsen, Green, & Ridley, 2017). It helps in showing the deviation from the expected standards that are set by the organizations. There are lot of research that goes in this, it aims to establish a relationship where company take charge of the expected results which they figure out based on a lot of research and assumptions. Post that they analyze the market and find the conditions that can influence their expected cost settings and based on all this they calculate the expected cost. Post that they compare the actual cost with the standard cost and the difference between the two are termed as variance. Now variance can be both favorable and unfavorable. Favorable variance is when the actual cost is less than the standard cost this implies the fact that the company was able enough to save their cost with their efforts and hence they are working in the correct direction (Epstein, 2018). Unfavorable variance is often the point of discussion in many companies, as they reflect the inefficiency of the management in matching up to the set standards, it affects the overall financial position of the company. It shows that the company has failed in more than many ways to deliver what it was expected of. When the actual costs are more than the expected cost, it shows that the company is not putting their efforts in the right directions. Hence when this happens, the costs are analyzed and based on that the decisions are taken by the company and they try to find out the reason why their expected costs where less than the actual cost and hence they try their best that in future similar things does not happen, where they must lose on their revenue (Delone & Mclean, 2004). The main aim of standard costing is to help the management in various decision-making process, management of resources, taking necessary steps as and when required and fueling all the operations of the company. It helps them in understanding that various aspects like prices fixation, decisions with relation to the buy-make the product, take analysis about the benefits that needs to be given to the organization. It has been adopted by many companies given that the benefits which organizations draw them is huge (Giacomo, Kamalesh, & Giovanna, 2013). The two articles have been taken into consideration for the different aspects of the standard costing and the various advantage and disadvantages of the standard costing is stated below:
Advantages of Standard Costing
- It helps the organizations in adopting better budgetary methods that can help them in reducing the overall cost and improve the overall profit for the companies around the globe.
- It helps the management in ascertaining that proper controls are in place. Controls helps in checking whether there has been a difference between the actual and expected and thus controls can help in increasing the efficiency of the management in attaining the desired outcomes. Hence it helps in establishing better controls on part of the management.
- Standard costing method helps the management in understanding the level of inefficiency that might be there on part of the company. Inefficiency occurs when the company does not attain the desired outcomes and thus when unfavourable variances occurs the companies can look for different reasons that have caused this so that in future they are able to attain the desired outcomes which they want.
- It also helps in establishing responsibility and authority as it helps the management in understanding whether the employees are working to the best of their abilities and are giving the desired outcomes that are needed. Thus, it helps in performance evaluation and management can ascertain how each department is contributing to the growth of the organization and what are the areas that they lack in and need some improvement so that in future the same problem will not continue for the company.
Disadvantages associated with Standard Costing
- The main concept of variance analysis is something that would help in allocation of the mistakes on part of the companies. But that is not effective because employees can only be held responsible for that activities which are controlled by them. It is important that concepts should be segregated into controllable and non-controllable actions and thus that would require a lot of efforts on part of the management and that is a complex portion. Hence, we see that proper allocation of the mistake require a more qualitative analysis (Covaleski, Evans, Luft, & Shields, 2003).
- There are a lot of assumption based on which these expected forecasts are dependent on. Few of these includes the past performance of the company, the maximum theoretical efficiency and helps in obtaining a good yield for the company. In case the management is not able to analyse these forecasts properly and the overall standard is very high for the company, then that would be highly demotivating for the employees of the company and unrealistic goals often leads to huge losses, as it hampers the efficiency of the members of the company. Hence, we see that assumptions should be set at achievable levels for the company.
- It is also very evident that changes are happening very now and then. Change is the only constant for the organisations and it is important that companies should analyse and update their standards on timely basis so that it is updated and helps them to work as per the recent trends and does not make the overall result redundant and not viable for the companies (Eddy, Filip,R, & Warlop, 2004). The overall requirement to update these changes on a timely basis is not good for the company as it leads to added cost, and the management is not always prepared to take such steps.
- It is one of the most expensive technique as companies needs to have great amount of technical skills for adoption of this technique and apply the same for their companies. Regular updating is important and companies might fail in it if they are not able to do that but that is also very expensive. Hence, we see that small and medium sized organizations are not able to apply these kinds of principles for their companies and hence it is only restricted for large departments but what we also see is that in large companies also it does not fit for all the departments (Charles H, Giovanna, Dennis M, & Robin W, 2015).
Discussion of the two journals.
The two journal articles which have been considered here for discussion on the given topic are “Standard Costing Games that Managers Play” by Cavatina, Richard V and Calvasina, Eugene J and “How to Tell If Standard Costs are Really Standard” by Barnes, John L.
Explanation of the Journals.
The first journal article highlights the importance of proper information that needs to be given to the managers for the preparation of their standard costing. It highlights the demerits that are associated with standard costing and in case companies fail then the main sufferer are them only. Thus the importance of proper information is highlighted in this article (Schoenberger, 2016). The second article deals with the need and importance of standard costing techniques and their evaluation in case of a textile industry. It highlights the methods that have become obsolete and how companies can change them and make them better (Johan, 2018).
Purpose of the Studies and Research Question
In case of the first study the authors highlight the various drawbacks in case of standard costing as it is dependent on the information that the managers are drawing. As per the author there are three methods for allocation of the basic function of standard costing- the first method includes determination of the expected values, second includes collecting the actual values and the third method includes evaluating the performance of the company by comparing the actual with the expected (Calvasina & Calvasina, 2017). The author has discussed the various standard costing technique with help of several games, like “Everlasting Standard Game”. This talks about companies in which the manager believe that implementation of standard costing is a onetime process and does not include updating them on timely basis and thus that leads the information to be redundant. The second game is the “Unbreakable Schedule Game”, as per which the standard costs are revised but only on the scheduled time set for such revision. No consideration is being given to the major changes in the costing or production techniques that are occurring between the dates set for revision, the overall system is very rigid and that might make the information irrelevant. The third game is named as the “Methods Change Variance Game”, that highlights the issues that are associated with inefficiency of the labor variance for the company. The fourth game is the “Material Mix Game”, which highlights the issues associated with material mix variance. The research questions have been stated below:
- What are the drawbacks that are associated with standard costing if there is no proper updating of the information?
- What are the various ways in which the companies can reduce these drawbacks and improve their overall position?
In case of second study it highlights the necessity of continuous updating the information when it comes to textile industry. The authors are a manager in the textile industry and he highlights the overall drawbacks that are associated with the present costing system of the company that includes that the costing system is not accurate, the overall cost objectives of the company. The author also highlights that the aim is to achieve the cost benefits that they desire of from the organizations (Trieu, 2017). He has stated that the information needs to be updated on timely basis. The management needs to set an objective for the automated mechanism for the collection of data and manage the flow of that. The management also needs to manage the calculate the variances and accurate cost estimates should be made and revisions of cost for the changes in the business environment needs to be done. The following research questions needs to be stated-
- What are the ways in which the companies can update the present system for the textile industry?
- What are the drawbacks that the companies face when the information is not updated on timely basis and makes the operations of the company irrelevant?
Similarities between the two articles
- Both the studies are focusing on the needs of the updating the information that the management needs for standard costing and highlights what will happen if the information is left redundant and not updated (Hansen, Otley, & Stede, 2003).
- Both the articles focus on methods by which they can improve the basis cost accounting system for the organization so that they get the best result in terms of cost effectiveness of the company.
- Both the articles have been well written and in a way highlights how standard costing is important and how companies can make use of it.
Dissimilarities between the two articles-
- The first articles highlight the drawbacks of the standard costing system in a way that if the information is not updated it would not it non-beneficial and the second article is highlighting the overall increase in standards of the cost accounting system. Cost accounting system needs to be developed and improved and same is highlighted in the second article (Johan, 2018).
- The first article is related to the application of the standard costing for all the organizations in normal and for other article it is especially related to the textile industry as one and whole and focuses on improving the cost system in that.
Specific Outcomes of the two articles.
From the above findings, there can be specific outcomes that can be stated by the articles and can be used for various stakeholders in the country. These specific outcomes from both the article is stated below-
- The first article states that the information that the manager is using should be current and accurate and should be highlighted and updated so that in future the managers can function as per that and get the best results. It also states that the information needs to be accurate and not ambiguous and same is stated in this article. It also highlights that the standards should be set in a positive way and the management should take as much actions as they may need (Cundill, Smart, & Wilson, 2017).
- The article also states how companies can improve this position., by analysing the source of information properly, by making sure that they are analysing the sources properly and then taking decisions based on that (Axelsen, Green, & Ridley, 2017).
Outcomes of the second article has been stated below:
- There are major issues in the textile manufacturing company Graniteville Company, and they have issues with the present costing system of the company. It can be improved by making the system better by automating it and documenting the system of cost accounting for the company (Naci & Hasan, 2012).
- The second outcome would be that they should try to insert the standard costing method with relation to the budgeting goals of the company and form proper budgets and analyse them accordingly for the company.
Based on the overall analysis it can be said that standard costing is a very unique concept and companies should use it accordingly. There are certain drawbacks that are associated with standard costing that the companies need to take care of. Standard costing requires lot of cost and effort which the organization needs to take care of and thus that would make it difficult for companies to adopt this method. But overall it is highly recommendable for reduction of the cost and improving the overall profits for the company.
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