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3.0 Executive Summary
The report focuses on the compatibility of Standard Costing in the current advancing manufacturing sector. Standard Costing had been developed decades ago and gained popularity in the manufacturing sector. Although, there are many criticisms placed on Standard Costing, many organizations are still utilizing Standard Costing in its operations for cost controlling and performance evaluation purposes. However, the Standard Costing has to be modified to comply with the fast-paced advancing manufacturing sector. Nevertheless, arguments on the compatibility of Standard Costing are still sound although the Standard Costing has been modified. The result of the report is able to provide useful information on Standard Costing as one of its management tool for cost controlling and performance evaluation. However, the cost of implementing Standard Costing requires further review and other management accounting techniques have to be considered as well.
I am a research assistant reporting to a finance director in a large manufacturing organization. My responsibility is to carry out special projects required by the finance director. The finance director wants to know more about the compatibility of standard costing in the advancing manufacturing sector today which relates to an article she has read. I have been asked to provide a brief report to brief the finance director on these issues. I am required to focus on other information sources on these issues that might inform the strategic direction of the organization and the nature of these information sources, their relevance and reliability.
Many theorists have been criticizing the information provided by standard costing (SC) is not longer significant for manufacturing organizations. (Carole 1990). Carole and Leo (1996) added on that the SC has been condemned since the early 1980s for not presenting the information needed for advancing manufacturing sector. Moreover, many people stated that just-in-time-based is far superior to the SC in the fast-paced business environment (Johnsen and Sopariwala 2000).
CIMA (2009) further commented that SC had diminished in its effectiveness recently because the advancing manufacturing organizations have similar processes for variety of products, where SC only aims to determine the difference between the actual overheads and standard overheads. However, Johnsen and Sopariwala (2000) argued that there are academics that provided ideas on improving or updating the SC to contribute significant information and be made more efficient in this new competitive business world. Therefore, this report will examine the existence and comparability of SC in the fast-paced and advancing manufacturing technologies in organizations.
There are advantages and disadvantages in utilizing SC as part of the management tool in the organization. Thomson and Gurowka (2005) stated that the advantage of SC was the simplicity of its operation. Sendroiu and Roman (2007) added that SC is able to contribute information on the manufacturing costs effective. They added that SC is useful as its variances help management to compare and contrast the costs that need to be emphasized.
However, Thomson and Gurowka (2005) also argued that the problem of SC is that poor application of SC may result in an unclear view of the cost, thus, improper for the management to utilize SC for strategic costing. In addition to that, Maskell (2005) agreed with Thomson and Gurowka and added that using SC in a manufacturing organization to make decision is harmful and misleading. Furthermore, Maskell (2005) stated that using SC in decision making may lead to poor decision-making.
6.0 Compatibility of Standard Costing in the Advancing Manufacturing Sector
6.1 Standard Costing still compatible in the Advancing Manufacturing Sector
Lucas (1997) argues that SC still plays a role in the advancing manufacturing sector today. Even though there are many criticisms of SC, the principles of SC are still being utilized in manufacturing organizations. The competitive position of an organization can be insightful with the unit cost of a product. Nevertheless, SC should be updated and modified in conjunction with the criticism to enable SC to play a significant role in cost controlling and performance evaluation. Therefore, the principles of SC is still being utilized in the advancing manufacturing sector but modifications on interpreting and calculating the variances have to be made (Lucas 1997).
This article is moderately relevant to the topic as the contents of the article are mainly base on SC and its role in today's manufacturing environment. It discusses the criticism and how SC had been modified to meet with the requirements in the advancing manufacturing sector, which is relevant to the topic. However, the article was published in 1997, where the research done in 1997 may not be the same as what it is today. Moreover, there were no empirical evidences on manufacturing organizations utilizing SC, only assumptions made by the author. However, the content of the article may be relevant as there are academics in the recent years support that SC is compatible and do play a role in the advancing manufacturing sector today.
The author of the article has 12 years' experience in the manufacturing industry as a financial manager and currently a lecturer in University of Buckingham. The author is reasonable reliable as the author has relatively ample amount of knowledge on management accounting techniques in the manufacturing sector. Moreover, the publisher of the article is Management Accounting: Magazine for Chartered Management Accountants, which is a well known publisher for management accounting materials. Therefore, the reliability of this article is particularly reliable.
Morelli and Wiberg (2003) did a case study on SC in Swedish Manufacturing Company, SKF. SC is utilized in SKF mainly for budgeting and inventory valuation. SC is very well embodied in SKF and it is a satisfying system because of its simplicity. However, improvements on the SC have to be made as its purpose may be different if no improvements are made. In SKF, SC is difficult to maintain as it consumes time to update. Despite that, SC is still widely used in the organization and it is perceived relevant to the organization even with the advancing manufacturing technologies today (Morelli and Wilberg 202).
The journal is particularly relevant to the topic as the journal emphasizes on the relevance and the role of standard costing in a manufacturing organization. The way the author research on SC is particularly relevant as the author looks into the organization thoroughly and there is empirical evidence to support its statements. Moreover, the date of publish is on 2003, which is not far from now. Thus, it may be relatively relevant to the topic.
The authors are from the School of Economics and Commercial Law and they might not have sufficient knowledge on management accounting techniques. However, there are many empirical researches done by the authors, thus it may still be reliable.
Johnsen and Sopariwala (2000) stated that SC has not become irrelevant in the fast-paced, advancing manufacturing sector. Parker Brass, a manufacturing company, had modified their SC to provide disaggregate and timely cost information for their management to make timely decisions. Moreover, SC was modified to provide supplementary variances to increase the efficiency and effectiveness of their productions. Therefore, SC has been modified to be compatible in the advancing manufacturing sector today (Johnsen and Sopariwala 2000).
The content of the article is based on management accounting and focuses on SC, the examples used in the article are also based on the manufacturing sector. Thus, it is relatively relevant to the topic. However, the article was published 10 years ago on year 2000, it may be relevant back then but it may not be relevant in the advancing manufacturing sector. The empirical research is based on one manufacturing organization, which may not be sufficient to be relevant.
David Johnsen is the cost accounting supervisor of Brass Products Division at Parker Hannifin Corporation in Otsego, Mich. The article is reliable as it is based on his company and Johnsen is experience and knowledgeable in the operations and the management accounting techniques used in his company. Moreover, the publisher of the article, Management Accounting Quarterly is a well known publisher. It publishes quarterly, online journals that contain in-depth articles by and for academics and practitioners of corporate accounting and financial management. Therefore, the publisher is highly reliable.
Bowhill and Lee (2002) did a case study on two manufacturing organizations in UK that adopted a variety of modern manufacturing techniques to examine the evolutionary role of accounting systems. Many academics have criticized the role of SC in the advancing manufacturing sector, and yet both organizations are still utilizing the SC in their operations. Despite the environmental changes in manufacturing, both companies have only made minimal changes to their existing accounting technique, SC. Bowhill and Lee (2002) stated that SC is not fully compatible with the advancing manufacturing sector, but SC still play a number of roles in the organizations. In the organizations, SC is utilized to provide a valuation of stock and also one basis of pricing, such as internal transfer price. Moreover, the weekly labor variances provided by SC is still relevant to the organizations for their operations. Additionally, the criticisms of SC were not observed in both the organizations in the case (Bowhill and Lee 2002).
The journal is reasonably relevant as it focuses on the compatibility of SC in the modern manufacturing sector, which is highly related to the topic. The date of publish of the journal is on 2002, which is relatively relevant but it can be considered. The authors adopted the case study approach to research on the compatibility of SC because the authors assume that it was a need to explore the extent of SC used in the organization. Thus, it is relevant to the topic.
The authors of the journal are knowledgeable on the topic due to their job profession. Additionally, the publisher of the journal, Journal of Applied Accounting Research is a well-known publisher that contributes high quality materials concerning the practices of accounting. Thus, it is highly reliable. Moreover, the results of the case study were the same as the Johnsen and Sopariwala, where they used the same approach to investigate on the utilization of SC in the organization. Thus, it is relatively reliable.
In Malaysia, a survey was conducted to examine the existence of SC in 21 Japanese organizations and 66 local organizations listed on the Kuala Lumpur Stock Exchange. 76% of the Japanese organizations and 70% of the local organizations still utilizes SC in their organizations. The Japanese organizations viewed that SC is important for costing their inventories. The standards of SC are reviewed twice yearly. The Japanese organization distinguished that the sales volume and material price variances are significant for control purposes. Instead, the local Malaysian organizations distinguished that SC is significant for cost controlling and performance evaluating. The standards of SC are reviewed once yearly and the significant variances of SC are the material price and usage variances for controlling purposes. However, both Japanese and local organizations in Malaysia viewed that the least important role of SC is obtaining "data processing economies". Despite the condemnation of SC, large majority of the organizations in Malaysia still utilizes SC in their business operations and views that SC is still compatible in the advancing manufacturing sector. In addition to that, the organizations in Malaysia mainly utilize the SC information for management planning and control (Sulaiman et al. 2005).
The content of the journal is on Management Accounting and focuses on SC. In addition to that, the empirical evidence of the journal is based on a survey and the samples used are 162 local Malaysian organizations and 104 from these samples are manufacturing organizations. Therefore, it is particularly relevant to the topic as majority of its samples are based on manufacturing organizations. Moreover, the journal was published on 2005, where it is quite recent. Thus, the journal is reasonably relevant.
The authors are high scholars and work in International Islamic University Malaysia. Furthermore, they had written a number of articles on Management Accounting. Thus, they are relatively reliable. The publisher of the article, Managerial Auditing Journal, is a well-known publisher which provides information on the current research and practices in accounting. Thus, it is highly reliable.
Rahman et al. (2003) conducted an industrial survey on the applications of management accounting techniques in Malaysian organizations. The reason behind the survey was, in general, actual utilization of management accounting techniques by Malaysian organizations are still limited. However, the result of the survey shows that approximately 70% of the organizations in Malaysia still utilize SC as their cost-management system (Rahman et al. 2003). Therefore, SC is still compatible in the advancing manufacturing sector in Malaysia.
The journal is not particularly about SC but focuses on Management Accounting techniques in general. Moreover, it does not focus on manufacturing sector alone where it takes into consideration all organizations. Therefore, it is not really relevant to the topic. However, there is important information on SC in the journal where they had a survey on which management accounting techniques are utilized in the organization. The results of the survey show that SC is still being used in Malaysian organizations and the journal can be considered relevant. The date of publication of the journal is on 2002, which is not considered a current issue. Thus, the journal is relatively irrelevant to the topic but some points of the journal can be considered relevant.
The authors of the journal may not be completely reliable as they are faculty of accountancy in University Technology MARA, Malaysia. They might be bias towards Management Accounting due to their job position when Rahman et al. (2003, pp.10) stated that, "The specialized role of management accountants must be promoted and from the statutory-bound financial accountants." However, the results of the survey are considered reliable as the survey by Sulaiman et.al (2005) portrays similar results on the utilization of SC in Malaysian organizations. In addition to that, the publisher of the journal is relatively reliable as the journal is published by the National Accounting Research Journal.
20 firms out of 25 large British manufacturing still utilize SC in their business operations. The 20 large British manufacturing organizations regularly utilize SC for efficient inventory control and on occasion, for preparing budgeting and forecasting. However, the utilization of SC was related to an attentiveness of cost savings accessible from proper inventory control procedures. In addition, majority of the organizations utilized SC for inventory valuation and were aware of the obligation to eradicate obsolete products (Fleischman and Parker 1991).
The journal is practically irrelevant even though the contents are focused on SC and manufacturing sector. The journal tends to be irrelevant due to the date of publish, which is at 1991. This is considered a very old journal and what had occurred in 1991 might not be related to the current issue in the advancing manufacturing sector. However, there are some points that might be considered relevant where there is evidence that SC is being utilized in the organization for cost controlling purposes.
The authors are highly educated in the field of accounting and finance and it can be considered reliable. Moreover, the publisher of the journal, The Accounting Review is a reputable publisher which publishes quality journals on the current issues of accounting. Thus, the journal can be deemed reliable.
6.2 Standard Costing Barely Compatible in the Advancing Manufacturing Sector
Maskell (2005) commented that utilizing SC in the organization for each product is misleading and causes poor decision-making. He added on that value stream costing is a better cost-management tool where it is straightforward, easy to understand and provides information that can be timely used for decision making. Using SC as a principle to make important decisions can be misleading and wrong (Maskell 2005).
The article particularly relevant in terms of date as the date of the article was published close to the current date. The article was also based on SC and the manufacturing sector which is relevant but, the research done is particularly limited as the author only made up an example to demonstrate the irrelevance of SC in the advancing manufacturing sector.
The author is experience in manufacturing and distribution industry and certified with the Chartered Institute of Management Accountants in London. He provides consultation services and implementations of advance manufacturing techniques for organizations in the United States, England, Europe and et cetera. The author is highly reliable but, the publisher of the article is by Maskell, which is the author's company. The reliability of the publisher is questionable as there is no segregation of author and publisher. Moreover, the author had mentioned that SC can lead to poor decisions and value stream cost is superior to SC but, there is no other empirical evidence to support that other than calculation examples. Thus, the reliability of the article is relatively poor.
Zoysa and Herath (2007) argued that SC may have obtained reputation among organizations as a significant tool for cost controlling and performance evaluation but with the advancing manufacturing technologies, the role of SC have started to decline. Despite the criticism of SC, it is still utilized by a huge number of manufacturing organizations. The research by Zoysa and Herath (2007) indicates that with the fast-paced and advancing manufacturing technologies, the role of SC have not been diminished to a minimal level. However, SC is still being utilized in Japan for dissimilar purposes, where SC was mainly utilized for the preparation of the financial statements instead of cost controlling and performance evaluation (Zoysa and Herath 2007).
The content of the journal is relevant to the topic as it emphasizes on the SC in the new manufacturing environment. The authors used classify appropriate literature and reviewed it methodologically to research on SC. Therefore, it is relevant to the topic. Moreover, the date of publish of the journal is in 2007, which is very recent. Therefore, the journal is extremely relevant.
Anura De Zoysa is a faculty of commerce, School of Accounting and Finance, University of Wollongong in Australia, whereas Siriyama Kanthi Herath highly knowledgeable in business administration. Thus, the journal is reliable in term of authors. However, the approaches the authors used are categorizing the appropriate literature and appraise the methodology of SC. There is no empirical evidence of SC being utilize in the manufacturing sector but there are many academics that comes to the same conclusion. Thus, it can be relatively reliable. The publisher of this journal, Industrial Management & Data Systems is very well known in providing journals that provide latest information on management accounting which aims to improve managerial skills. As a result, the publisher of the journal is very reliable.
A survey was conducted by Guilding et al. (1998) on the practices of SC in United Kingdom (UK) and New Zealand (NZ) manufacturing organizations. The results of the survey indicate that 76% of UK and 73% of NZ manufacturing organizations still utilizes SC in their operations. Most of the UK manufacturing organizations set their standards based on design and engineering studies whereas, manufacturing organizations in NZ sets their standards based on past performance. However, the organizations in both UK and NZ perceived that the standards are practicable but hard to attain as well as "average past performance standards" whereas, minority of the organizations in UK and NZ obtained maximum efficiency standards. Moreover, 33% of the sampled manufacturing organizations in UK and 44% of the sampled manufacturing organizations in NZ will abandon the use of SC if they implement advanced manufacturing technology and just in time management. It is perceived that the role of SC might be diminished in the advancing manufacturing sector (Guilding et al. 1998).
The content of the journal is partly relevant because the journal is about budget and SC, whereas the topic only focuses on SC. However, the journal emphasize on the manufacturing sector in NZ and UK, which is relevant to the topic. Furthermore, the approach the authors exercised was a survey on budgeting and SC utilized in the manufacturing sector. This shows that the approach use was relevant to the topic. However, the journal was published in 1998, which was rather long ago. The survey in 1998 may not be relevant now as the manufacturing sector is ever changing.
The authors are faculties of Griffith University and Huddersfield University Business School, which proves that the authors are knowledgeable in accounting techniques. Thus, it is rather reliable. Furthermore, the survey samples collected are from 303 accountants of the manufacturing organizations, which is reliable to a certain extent. However, even though the journal is reasonably reliable, it came in to a contrast in result with the survey done by Sulaiman el al. (2005). The publisher is fairly reliable as The Journal of International Accounting is a reputable publisher that publishes articles related to accounting.
Shank and Fisher (1999) stated that the most useful cost-management tool should emphasize on supreme manufacturing cost against target cost rather than actual cost. The SC will be irrelevant in the fast-paced, advancing manufacturing sector. Shank and Fisher (1999) did a case study on a U.S. manufacturing organization to examine that target costing is a more strategic tool compared to SC and the results have proven that target costing is far superior than SC in the fast-paced advancing manufacturing sector.
The relevance of the content in the article is relevant to a certain extant as it focuses on target costing rather than SC in the manufacturing sector. Nevertheless, it still relates to SC as it compares target costing with SC. The approach the authors used is fairly relevant as it examines a case study on a manufacturing organization regarding target costing and SC. However, the date of the journal published is long ago, in 1999, which may not be relevant now as the manufacturing organization is advancing in its techniques and technologies.
The authors are very knowledgeable in accounting techniques as they are scholars in that subject which proves to be very reliable. Furthermore, the method used by the authors to prove that target costing is a strategic tool rather than SC is not relatively reliable seeing that it only used 1 organization as an example, whereas every organization has different nature and operation. Thus, it may not be fairly reliable. On the other hand, Morelli and Wiberg (2003) had used the same approach, case study, to examine the compatibility of SC, and came out with a result that differs from Shank and Fisher (1999). Thus, the reliability of the results may be questionable. However, the publisher of this journal, MIT Sloan management Review is a trustful source of business journals that relate to management researches and practices.
At the beginning of the industrial revolution, SC had played a role in cost valuation in the U.K. and U.S. manufacturing organizations. However, in the late 1990s, where productions of identical products in bulks were becoming more widespread, SC was being criticized for not providing significance to the organizations. Fleishman and Tyson (1998) agreed with Guilding et al. that with the fast-paced and advancing manufacturing sector, most organizations have moved from operational control to customer satisfaction and quality improvements. Therefore, SC for cost controlling and performance valuation has been replaced by target costing method for continuous cost reductions (Fleishman and Tyson 1998).
The main issue stated in the article is relevant to the topic as it demonstrates the evolution of SC in the U.K. and the U.S. manufacturing organizations. Moreover, the date of publish of the article was in 1998, which would be considered not relevant to related to the topic as the manufacturing sector is advancing currently.
The authors have written a book on accounting history and they are erudite with the field of accountancy as both authors are Professor of Accountancy, which shows that the authors are reliable. This article is published by Abacus, which is a popular business magazine that provides independent thought and current issues in accounting, finance and business. Thus, the article is relatively reliable.
Popesko and Novak (2007) had conducted a survey on the management techniques used in Czech Republic organizations. The results show that SC is the most widely used management accounting technique in the Czech Republic organizations. However, a number of organizations were not satisfied with the Management Accounting technique, where they assume that the system is not accurate and does not provide a clear picture of the cost. Thus, the results of the survey demonstrates that SC is not compatible with the advancing manufacturing sector as there are many negative views on SC by the organizations in Czech Republic (Popesko and Novak 2007).
The content of the journal is partly related to SC as the journal focuses on activity-based costing applications in the Czech Republic. However, the survey done by the authors is relevant to the topic as they conduct the survey to examine the management techniques used in the organizations, where SC was the most widely used technique in Czech Republic. The date of publish is in 2007, which is quite recent to the advancing manufacturing sector today. Thus, it is relatively relevant.
Both the authors are faculties of Management and Economics in Tomas Bata University in Zlin, which proves that the authors are experts in the management techniques. Thus, the authors are reasonably reliable. However, the survey done by the authors are quite reliable as they took a sample of 153 companies with average structures in the region.
SC had been criticized and condemned over the decades for not being able to comply with the fast-paced advancing manufacturing sector. In the current modern world of manufacturing, majority of the manufacturing organizations have restructured and reorganized, from cost controlling to quality control and customer satisfactory, to meet with the ever changing manufacturing environment. In addition to that, there are other management accounting techniques that can easily replace SC, such as target costing for the purpose of cost controlling and performance evaluation.
However, there are empirical evidences that there are still a large amount of manufacturing organizations are still utilizing SC in their operations. The organizations mainly utilize SC for cost controlling and performance valuation. I agree that SC can be a useful tool in manufacturing organizations; nevertheless, SC has to be modified and updated to meet with the new manufacturing environment to fulfill its roles as a cost controlling systems in the organizations. However, it takes an ample amount of work and time to modify the SC to comply with the advancing manufacturing sector.
The information sources used in the report is mostly relevant. Approximately 90% of the information sources are relevant to the topic. However, the date of publish of the information sources may not be relevant as the manufacturing sector is always developing and advancing. Most of the articles and journals are published more than 5 years ago. The research approaches that the author used were fairly relevant to be examined.
The authors that produced the information sources are reliable as all of them are knowledgeable scholars. However, minority of them have written other journals or articles. The publishers of the information sources are all well known and reliable as they publish high quality journals and articles that portray the current issues in the accounting world today.
8.0 Reference List
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Cheatham, C. (1990) Updating standard cost systems. Journal of Accountancy. pp. 57-60.
Cheatham, C.B. and Cheatham, L.R. (1996) Redesigning cost systems: is standard costing obsolete? Accounting Horizons. 10(4), pp. 23-31.
CIMA. (2007) Theory of constraints and throughput accounting. The Chartered Institute of Management Accountants. pp. 1-10.
Fleischman, R.K. and Parker L.D. (1991) British entrepreneurs and pre-industrial revolution evidence of cost management. The Accounting Review. 66(2), pp. 361-375.
Drury, C. and Tayles, M. (1994) Product costing in UK manufacturing organizations. The European Accounting Review. 3(3), pp. 443-469.
Edwards, J.R., Boyns, T. and Matthews, M. (2001) Standard costing and budgetary control in the British iron and steel industry. Accounting, Auditing & Accountability Journal. 15(1), pp. 12-45.
Fleischman, R.K. and Tyson, T.N. (1998) The evolution of standard costing in the U.K. and U.S.: from decision making to control. ABACUS. 34(1), pp. 92-119.
Guilding, C., Lamminmaki, D. and Drury, C. (1998) Budgeting and standard costing practices in New Zealand and the United Kingdom. The International Journal of Accounting. 33(5), pp. 569-587.
Johnsen, D. and Sopariwala, P. (2000) Cost is alive and well at Parker Brass. Management Accounting Quarterly. pp. 1-9.
Lucas, M. (1997) Standard costing and its role in today's manufacturing environment. Management Accounting: Magazine for Chartered Management Accountants. 75(4), pp. 32-34.
Mclean, T. and Tyson, T. (2006) Standard costs, standard costing and the introduction of scientific management and new technology into the post-second world war sunderland shipbuilding industry. Accounting, Business & History. 16(3), pp. 389-417.
Maskell, B.H. (2005) Standard costing can lead to poor decisions. Maskell.
Morelli, B. and Wiberg, C.J. (2002) The standard costing system at SKF. Master Thesis, Goteborg University
Popesko, B. and Novak, P. (2007) Activity-based costing applications in the Czech Republic. Tomas Bata University.
Rahman, I.K.A., Omar, N. and Abidin, Z.Z. (2003) The applications of management accounting techniques in Malaysian companies: an industrial survey. National Accounting Research Journal. pp.1-12.
Shank, J.K. and Fisher, J. (1999) Target costing as a strategic tool. Sloan Management Review. pp. 73-82.
Sulaiman, M., Ahmad, N.N.N. and Alwi, N.M. (2005) Is standard costing obsolete? Empirical evidence from Malaysia. Managerial Auditing Journal. 20(2), pp.109-124.
Thomson, J. and Gurowka, J. (2005) Sorting out the clutter. Strategic Finance. pp. 27-33.
Zoysa, A.D. and Herath, S.K. (2007) Standard costing in Japanese firms. Industrial Management & Data. 107(2), pp. 271-283.