This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Table of Contents
Standard costing system is an accounting system created to allocate the costs of labours, materials, overheads, and selling or general or administrative accounts on a unit basis (VentureLine). Standard cost are used to periodically compare with actual costs to provide a challenging target which can motivate the employees to achieve the target under higher efficiency of working condition. Standard costs are also used to provide a basis in setting price for the finished goods by adjusted to the changing environment.
The use of standard costing is to provide a prediction of future costs for decision making. Standard costs indicate the future target costs which do not incorporate the inefficiencies so that standard costs can provide more appropriate information because efficient competitors will seek to eliminate avoidable costs which will eventually increase the efficiency. Standard costing is used as a control device by highlighting those activities which do not correspond with the plan because the management can take the appropriate corrective actions after reviewing the activity that showed the standard costs are out of control. The management by exception is facilitated by using the standard costing in the variance analysis.
There are three types of standard which are the basic standard, current standard and attainable standard that can be used in a standard costing system (Fazal, 2011). The basic standard refers to a minimum requirement which is unchallenging and demotivating. This causes high inefficiency and wastages due to the requirement that is easy to achieve. This standard remains unchanged for long period of time which does not represent current conditions and are outdated. Therefore, basic standard is act as standard for other standard and it is very useful for establishing efficiency trends. This standard will not be used unless it is updated because it will not help in short term period variance analysis.
Besides that, current standard is based on current working condition. Thus, it is not giving improvement. It cannot be demotivating since it is also challenging. However, it consisted many of the high inefficiency. This standard is set purposely for short term period and it is widely used in the business because it is the most relevant standard which is used for the control purpose since it is represents the business currently achieving target (Fazal, 2011).
Furthermore, attainable standard is achievable under normal working condition. This standard can be achieved based on high efficiency and productivity level with some allowances for inefficiency and wastages. Attainable standard is an expected standard; therefore it is motivating with the challenging targets. Meanwhile, good managers will always try to achieve the attainable standard so that no resources unused and to show good performances by allocating the resources accordingly to decrease wastages.
The addition of standard cost of the manufacturing elements which are included the direct materials, direct labour and manufacturing overheads is represents the standard cost of production. There are two components of standard quantity and standard price which are important for setting of the direct material standard. The standard quantity refers to the quantity that is expected to be used whereas the standard price indicates the planned price that used to purchase one unit of material. Hence, the standard quantity is multiplied with the standard price to find out the standard cost of direct material.
Meanwhile, the components of standard labour rate and standard labour hours are used in the setting of direct labour standards. The standard rate for each hour of labour is decided based on the labour contracts or wage surveys while the standard hour for each unit of product is determined by conducting the operation of time and motion studies for each labour. Thus, the standard cost of direct labour can be evaluated through the multiplication of the standard rate and the standard hours.
In addition, manufacturing overheads refer to the indirect manufacturing costs which are contained both fixed and variable overheads. The basis of allocation of direct labours hours are used in the setting of the manufacturing overheads. Only the variable overhead is absorbed into product for the variable costing method whereas both the fixed and variable overhead costs are absorbed into product for the absorption costing method (Kasim, Amiruddin, Aziz, & Puteh, 2011). Therefore, the standard labour hours for one unit of product is multiplied with the standard variable overhead rate to count the standard cost for variable overhead while the standard cost for fixed overhead is computed by multiplied the standard labour hours for one unit of product with the standard fixed overhead rate.
The standard costs are determined to measure the planned cost that needed for direct materials, direct labours and manufacturing overheads of one unit of product. After setting the standard costs, the standard costs are used to compare with the actual costs to check whether the business is following with the business plan. The standard costs are reviewed to take any corrective actions needed to increase the productivity of the business so that can also eventually improve the performance of the organization. Besides that, standard costs are reviewed to avoid misstatement of the inventory in the financial statement so that can provide a good reporting of the financial statement which enables good decision making of the investors towards the organization.
The comparison between the standard cost and actual cost is to check whether any variances are incurred. A variance is arises whenever the actual cost is different from the standard cost. Meantime, there is no variance occurred when the actual cost is equal to the standard cost. Variances are categorized into favourable and adverse by looking into the effects of the variance on the planned profit. Basically, the adverse variance is arises when the actual cost higher than the standard cost whereas the favourable variance occurred when the actual cost less than the standard cost.
The arising of the variance indicates that the plan has not been achieved since the actual performance is not following to the plan accordingly. Therefore, it is necessary to analyse the variances by considering the causes of the variance. The concept of management by exception is applied to focus on the important variances only since it is impossible to investigate all the variances so that the management can take appropriate actions to control cost and enhance the profitability to improve the future performance of an organization.
The significant variances rely on the size of the organization, types of organization and production process. Normally, the variance is investigated based on the different reasons such as the smaller variances are not significant to compare with the bigger variances and it is worth to analyse the variances that occurred persistently. Besides that, the variances that possess certain trends over a period of time and only the controllable variances that can be changed are needed for investigation. The examination of variances occurred when their benefits exceed costs and the adverse variances are corrected to improve better performance.
The reason of the reviewing for the standard is because variances are too aggregated where they are not rely on specific product lines, production batches or flexible management system. The importance of direct labour is overemphasised because the importance of labour costs is reduced due to the reality of flexible manufacturing system. Furthermore, standard costing may not relevant in flexible manufacturing system with short life cycle products because the cost minimization is more focused instead of increasing product quality or customer services that are inconsistent. Moreover, the feedback reporting is delayed due to lack of timely reporting of variances.
The cause of the standards needs to be reviewed due to the planning and operating variances. This is because the planning variances might not updated with the latest circumstances which will causes the variances are investigated between operational and planning factors. This target accomplished by organization during the planning period is the target that should be accomplished in the ex-post optimum programme. Hence, it is important to review the standard costs periodically to ensure the planned cost is always updated and adjusted with the changes of condition so that the variances can be produced and compared without any errors.
Financial goals like total sales and profitability are the sole performance that fails to provide information about intangibles that drive success. Meanwhile, non-financial objectives such as employee welfare, customer services and public relations are improving company as a whole because it provides information about intangibles that used to perform better in the business (Evans, 2014). Thus, the company should approach both financial and non-financial objectives through balanced scorecard so that can improve the overall organizational performance.
Employee welfare is important because the organization is relying on the workforce to continue their operation. The organizational leader has the duty to recruit and retain the potential employees by giving the non-financial benefits such as healthcare, training programs and retirement planning to enhance the satisfaction of employees. This is the strategy used to retain the talented workers so that can increase the ability of the employees to enhance the company’s success.
Besides that, customer service is also important because the profit of the organization is depends on the customers. The organization should always improve and maintain the quality of products and services so that the customers can receive the best products and services besides increasing the customer base in organization. The organization leader should regulate the effectiveness of customer service programs and assess their customer service objective regularly in order to ensure the customer satisfaction and can always keep the customers in the business which can boost the revenue within an organization.
Furthermore, another important non-financial objective is the public relations by maintaining the company’s public image (Frost & Media, 2014). The organization needs to improve their general views so that the business can be increased and the relationship with community can be strengthened. The organization can build up their public relations by showing their professional image, establish positive social media presence and give back benefits to the community such as organization can donates time and money to the charity.
In conclude, standard costing is still applied in many companies in variance analysis to control cost and evaluate the performance of company. Therefore, standard costing must always updated so that it can be used for many purposes and is expected to continue perform an important role in the future (Kasim, Amiruddin, Aziz, & Puteh, 2011).
Crowder, C. (2014) Three Tips to make Standard Cost Accounting More Effective. [online] 23rd January 2014
[Accessed 10th December 2014]
Das, P. and Ahmad, J. H. (2007) Cost Accounting. 4th ed. Selangor: Herald Printers Sdn. Bhd.
Drury, C. (2012) Management and Cost Accounting. United Kingdom: Brendan George
Edwards-Nutton, S. and Technical Information Service. (2008) Standard Costing and Variance Analysis: Standard costing and variance analysis application. pp. 4-7
Evans, K. (2014) Importance of Non-Financial Objectives to the Success of an Enterprise. [online]
[Accessed at 9th December 2014]
Fazal, H. (2011) What are different types of standards under standard costing? [online]
[Accessed 30th November 2014]
Frost, S. and Media, D. (2014) List of Non-Financial Performance Objectives. [online]
[Accessed 4th December 2014]
Nor Aziah Abu Kasim; Rozita Amiruddin; Rozainun Haji Abdul Aziz and Che Hamidah Che Puteh (2011) Management Accounting. 1st ed. New York: Oxford
VentureLine. Standard Cost System Definition. [online]
[Accessed 28th November 2014]