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Standard Costing

Preaentation week 6 Cost and Management Accounting

Trang Tran Minh

on 8 April 2011

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Transcript of Standard Costing

Standard Costing Introduction Advantages Disadvantages References 1. Introduction
2. Advantages
3. Disadvantages
4. Conclusion
Q&A Efficiency Requires a study of the business and its processes Brings inefficiencies and defects
-> correct such mistakes and promotes efficiency.
Brings inefficiencies and defects
-> correct such mistakes and promotes efficiency Method of comparing actual and standard costs
-> enable to evaluate performance of cost centres
( Nahab 2010 )
Employees provide benchmarks that individuals can use to judge their own performance
(Accounting for management 2011)
Price Fixing determine prices and formulates production policies in advance also allows making estimates during product planning
Simplifies valuation of stock by transferring the difference between standard costs and actual costs to a separate variance account.
( Nahab 2010 ) promotes management by exception
identifies the cost of individual processes or products Management aspect sets target easily and organization of an incentive system simple as well
( Nahab 2010 ) Accounting for management 2011, “Advantages and Disadvantages of Standard Costing and Variance Analysis”, viewed on 4 April 2011 <http://www.accountingformanagement.com/advantages_disadvantages_standard_costing.htm>.

Ask, U. & Ax, C., 1997. ‘A survey of cost accounting practice in a manufacturing setting––the Swedish case’ Journal of Theory and Practice of Management

Brown, G 2011,Introduction to Cost Accounting: Methods and Techniques, Chap4 : Standard Costing, Globusz Publishing, viewed 6 April 2011

Drury, C. 1999 ‘Standard costing: A technique at variance with modern management?’, Management accounting, Vol 77, Issue 11

Guilding F, Lamminmaki D and Drury C 1998, ‘Budgeting and Standard Costing Practices in New Zealand and the United Kingdom’, The International Journal of Accounting,Vol.33, No.5

Horngren; Datar; Foster, 2003, "Cost Accounting A Managerial Emphasis", International Edition, 11edt, pg.223.

Hsiao T 2006, ‘Establish standards of standard costing with the application of convergent gray zone test’, European Journal of Operational Research, No.168

Morelli, B & Wiberg, C, 2002, "Standard Costing System at SKF, A Case Study of A Swedish Manufacturing Company", Accounting and Finance Master Thesis No 2002, 48, viewed on 4 April 2011

Nayab, N 2010, “ Top 4 Advantages of Standard Costing”, The Hub For Bright Minds, viewed on 4 April 2011
<http://www.brighthub.com/office/finance/articles/82421.aspx > .

Victor D 2010, Standard Costing: Limitations and Diadvantages’, Helium Finance & Insurance, 09 April, Viewed 08 April 2911 < http://www.helium.com/items/1799569-disadvantages-of-standard-costing> United States 86% Ireland 85% UK 76% Japan 65% Sweden 73% The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances. Although Standard Costing had been developed in the early decades of the 20th century, it was in the late 1950s and early 1960s that responsibility accounting developed rapidly. The world leading producer of ball bearing Standard costing has been used widely around the world. Vietnam Conclusion Some studies reported that the importance of standard costing has been waning as a resultof changes recurring in the manufacturing environment
(Drury, 1992; Lessner, 1989; Howell& Soucy, 1987)

Other authors have argued that Standard costing will continue to maintain its signicance in the future in some revised form like inclusion of nonnancial indicators in the standard costing system. Q&A Today’s Business Trends Entering the 21st century, many experts predicted standard costing would demise because of alterations in the business environment
(Drury, 1999)
Increasingly dynamic & complex (Hsiao 2006)
- Diverse & complicated products (Customer-orientation)
- Quality emphasis
- Intensive use of advanced manufacturing technology Diverse products - Larger number of products, product series are short, many manufacturing elements are performed and many components are included in the products (Ask & Ax, 1997)
- Products adapted to individual customers -> much differentiated
- More complicated cultivation and interpreting of variances.
- Time and cost consuming
-> maintaining the system may be come a burden Quality Emphasis - Standard costing is unable to reflect changes other than the costs incurred and resources consumed, especially the quality in goods/services provided
- Example:
Merely favourable variance in cost of a hamburger might actually mean less meat was used
 ->Lower quality & dissatisfied customers
The quality of the product is increasing and becomes more smoothed, which in turn will lead to less spoilage, less cassations and less rework
-> Unnecessary to register and follow up variances in a manufacturing environment where quality is in focus
(since this would result in minimum variances between standards and outcome anyway) Intensive use of advanced manufacturing technology Standard costing assumes that the production process is labour-paced (if labour works faster, output will go up)
-> Output in many companies is no longer determined by how fast labor works
-> the processing speed of machines
Behavioural Effects Behavioural Effects - One purpose of standards is to provide a target, and such a target can have a beneficial effect on motivation.

- If a standard costing system is poorly implemented it can have a demotivational effect on people
(Morelli & Wiberg 2002) Achievability of standards A study on nearly 400 companies in the UK and New Zealand revealed:
- Overly rigid standards: give employees a impression that some objective is unattainable.
-> frustration, negligence, failure to induce corrective action of unfavorable variance, or even dysfunctional behavior
- Loose standards: become a shelter of unfavorable variance
-> lack enthusiasm and corrective motivation
(Hsiao T 2006)
Dysfunctional Behaviours - Employees and departmental managers focus on short term goals instead of long term interest
-> might try to "game" the system such that quality might suffer in favour of production
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