StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Management of Accounting Development Standard Costing and the Relationship - Report Example

Cite this document
Summary
This report "Management of Accounting Development Standard Costing and the Relationship" describes standard costing and the relationship it may have with other management accounting development. This report outlines cost control, pricing decisions, cost awareness…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER95.7% of users find it useful
Management of Accounting Development Standard Costing and the Relationship
Read Text Preview

Extract of sample "Management of Accounting Development Standard Costing and the Relationship"

1. Main principles of Standards costing and variance analysis Standard costing refers to the principles and procedure which involve the use of predetermined standard costs relating to each element of cost, and for each line of product manufactured or service rendered. A standard cost is an estimated cost which suggests what the cost should be under given conditions. The Terminology of Cost Accountancy defines standard costing as “the preparation and use of standards costs, their comparison with actual costs, and analysis of variances to their causes and points of incidence.” The technique of standard costing thus involves: a. The ascertainment of standard costs b. The use of standard costs c. Their comparison with the actual costs and the measurement of variances d. The analysis of variances for ascertaining the reasons for the same and e. The location of responsibility for the variances and the corrective action to be taken. Since the technique is based wholly on the ascertainment of standard costs, it is necessary to know what these standard costs are. Standard costs are pre-determined or forecast estimates of cost to manufacture a single unit, or a number of units of a product, during a specific immediate future period. They are usually the planned costs of the products under current and anticipated conditions, but sometimes they are the costs under normal or ideal conditions of efficiency, based on an assumed given output, and having regard to current conditions. They are revised to conform to super-normal or sub-normal conditions, but ore practically to allow for persisting alterations in the prices of material and labour. Therefore, a standard cost can be defined as “A pre-determined cost calculated with respect to a prescribed set of working conditions, correlating technical specifications and scientific measurements of materials and labour to the price and wage rates expected to apply during the period to which the standard cost is expected to relate, with an addition of an appropriate share of budgeted overhead. Its main objective is to provide bases of control through variance accounting for the valuation of stocks and work-in-progress and in exceptional cases for fixing selling prices.” The use of standards facilitates many business functions. Standards are very useful in the monitoring and controlling of business activities in general. The need for standard costs arises as a result of the benefits it provides for a business, such as Cost control Pricing decisions Performance appraisal Cost awareness Management by objectives Cost Control Cost control does not merely refer to minimization of costs. Cost control means identifying costs with their benefits and ensuring that the costs are justified, given the benefits that are derived. Standard costs provide a very useful framework for cost control. The great value of standards in cost control is that they provide the ability to compare actual costs with desired costs on a timely basis. Timely reporting of difference i.e. monthly, weekly, daily or for each work shift etc, between actual and standard costs allows managers to take appropriate action to correct problems and maintain desired performance. Without standards many cost control problems would go undetected until considerable damage is done. Pricing Decisions A company’s product pricing decisions are greatly influenced by costs. When the cost of a product is used in determining its selling price, standard costs are used more often than actual costs, as standard costs reflect the desired or expected cost of a product, whereas actual costs may include efficiencies or inefficiencies of production that are not expected to prevail and that cannot be anticipated when the pricing decision is made. Performance Appraisal The performance evaluation of employees is an onerous task, involving different variables, some of them being subjective and hence difficult or inappropriate to use in comparing employees. When standards are established for evaluating employee performance, they provide tangible measurement inputs that can be applied uniformly to all employees. Cost Awareness Most employees have little or no awareness of cost associated with business activities. Standard costs and standard cost performance reports often inform employees about the cost implications of their actions. Such cost awareness may result in better employee efforts at cost control. Management by Objectives This is a concept in which managers establish specific objectives for all business activities. When such activities are within the desired performance levels, little or no management action is necessary. However, when performance is at wide variance with desired levels, management takes suitable action. Standards provide the quick, ready reference for identifying and reporting variances from acceptable performance levels. Variance Analysis Standards may be set and variance computed not only for each cost element but also for each of the factors which determines the cost. The variances of particular elements of cost and those relating to quantity and price are known as principle variances. When variances and analyzed, a principal variance may be found to have a number of constituent parts. A cost variance which is only a part of the principal variance is known as a sub-variance. Variances may be expressed either in amounts or in percentages. When it is expressed in amount, the variance is calculated by subtracting actual cost from the standards cost. To express variance as a percentage, the ratio of actual cost to the standard cost is multiplied by 100. Thus, the actual cost is obtained as a percentage of the standards cost. The base for comparison is the standard cost (100). Hence, the actual cost percentage figure should be deducted from the standard cost percentage (100) to derive the cost variance in percentage. 2. Activity-based costing and Target costing Activity-based costing - Applying overhead costs to each product or service based on the extent to which that product or service causes overhead cost to be incurred is the primary objective of accounting for overhead costs. In many production processes overhead is applied to products using a single predetermined overhead rate based on a single activity measure. With Activity-Based Costing (ABC), multiple activities are identified in the production processes that are associated with costs. The events within these activities that cause work (costs) are called cost drivers. The cost drivers are used to apply overheads to products and services when using ABC. ABC is valuable for planning, because the establishment of an ABC system requires a careful study of the total manufacturing or service process of an organization. ABC highlights the causes of costs. An analysis of these causes can identify activities that do not add to the value of the product. These activities include moving materials and accounting for transactions. Although these activities cannot be completely eliminated, they may be reduced. Recognition of how various activities affect costs can lead to modifications in the planning of factory layouts and increased efforts in the design process stage to reduce future manufacturing costs. An analysis of activities can also lead to better performance measurement. Workers on the line often understand activities better than costs and can be evaluated accordingly. At higher management levels, the activities can be aggregated to coincide with responsibility centres. Managers would be responsible for the costs of the activities associated with their responsibility. Target Costing – Target costing has recently received considerable attention. Target cost can be defined as “a market-based cost that is calculated using a sales price necessary to capture a predetermined market share.” In competitive industries a unit sales price would be established independent of the initial product cost. If the target cost is below the initial forecast of product cost, the company drives the unit cost down over a designed period to compete. Japanese cost management is known to be guided by the concept of target cost. Management decides, before the product is designed, what a product should cost, based on marketing factors. The target costing philosophy leads to a market-driven approach to accounting. While introducing a new product, a company might test the market to determine the price it can charge in order to be competitive with products already on the market of similar function and quality. A target cost is the maximum manufactured cost for a product. It is arrived at by subtracting from its expected market price the required margin on sales. Target costing is a market-driven design methodology. It estimates the cost for a product and then designs the product to meet that cost. It is used to encourage the various departments involved in design and production to find less expensive ways of achieving similar or better product features and quality. It is a cost management tool which reduces a product’s costs over its entire life cycle. 3. Standard Costing versus ABC & Target Costing The primary variation between the standard costing and ABC analysis is that the later is more logical in segregating and restricting cost centred spending in work activities. The former does a similar job but the segregation is based on departments, which does not seem to be as beneficial when compared to the later. In ABC analysis, the so segregated spending pools are matched with the various work activities (Cokins). This way the actual and true picture of the consumption rate of that particular pool can be figured out. Another difference between the standard costing and ABC analysis is that the later can be frequently updated and refreshed whereas the former has not got such possibility. ABC analysis is often updated on a monthly, quarterly or weekly basis but standard costing is updated only on an annual basis. Standard costing would apply the overhead costs based on a single measure of activity. With ABC, activities are chosen and the overhead costs are distributed to cost pools within these activities through resource drivers. The costs of activities are then applied to products through activity drivers. Standard costing versus Target costing Target costs are conceptually different from standard costs. Standard costs are predetermined costs built up from an internal analysis by industrial engineers. Target costs are based on external analysis of markets and competitors. Standard costing is used mainly in mass production as a tool for control. Costs for standard parts are established by work study or experience, actual costs then being checked against the standard costs (Money Glossary.com). Target costing is a reversed cost accounting technique. Instead of calculating costs first and then setting the price based on these calculated costs, target costing does it the other way around. Target costing is convenient for firms operating in perfect competition. The standard costing approach is to develop a product and then approach the market with a price that was based on a cost-plus calculation. But according to Target costing the process starts at the market price of the product and subtracting a target profit from its price to arrive at a target cost. The product is then developed in such an environment where the market price and the permissible cost components for a product are known. Another major difference between these two methods of costing is that standard costing tends to accept existing structures and only leads to incremental cost reduction. When it comes to Target costing it is more radical and it also provides the opportunity for completely new and innovative approaches of costing (Hergeth). Target costing reduces the development cycle of a product. Costs can be targeted at the same time the product is being designed, bringing in the resources of the manufacturing and finance departments to ensure that all avenues of cost reduction are being explored and that the product is designed for manufacturability at an early stage of development. Standard costing lacks in this combination of activities. Target costing is also used to forecast future costs and to provide motivation to meet future cost goals whereas standard cost is a predetermined cost arrived at by internal analysis. Target costing is very attractive because it is used to control costs before the company even incurs any production costs, which save a great deal of time and money. Bibliography Cokins, Gary. Activity Based Cost Management. John Wiley and Sons, 2001. Hergeth, Helmut. "Target Costing in the Textile Complex." Journal of Textile and Apparal (2002): 1-5. Money Glossary.com. Standard Costing. 23 march 2007. 9 May 2008 . The ICFAI University Press. Introduction to Management Accounting. Hyderabad: The ICFAI University Press, 2004. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Standard Costing and the Relationship It May Have with Other Coursework, n.d.)
Standard Costing and the Relationship It May Have with Other Coursework. Retrieved from https://studentshare.org/management/1546326-standard-costing-and-the-relationship-it-may-have-with-other-management-accounting-development
(Standard Costing and the Relationship It May Have With Other Coursework)
Standard Costing and the Relationship It May Have With Other Coursework. https://studentshare.org/management/1546326-standard-costing-and-the-relationship-it-may-have-with-other-management-accounting-development.
“Standard Costing and the Relationship It May Have With Other Coursework”. https://studentshare.org/management/1546326-standard-costing-and-the-relationship-it-may-have-with-other-management-accounting-development.
  • Cited: 0 times

CHECK THESE SAMPLES OF Management of Accounting Development Standard Costing and the Relationship

Airbus: Financial Benefits & Costs

The company uses standard costing and ABC system of costing that has benefited it from the past.... The relevance, application, advantages, disadvantages, and benefits of various costing systems such as Activity Based costing, standard costing, and relevant costs will be described in the sections below.... Airbus: Financial Benefits & Costs The company is also likely to benefit from the mentioned costing systems due to the various advantages mentioned in the relevant sections of the paper....
13 Pages (3250 words) Research Paper

Financial Performance: the Activity Based Costing

Here an example is given to know the difference about the activity based costing and conventional costing.... But before stating it, we need to critically analyze the financial performances reports and compare the financial performance of activity based costing and conventional costing methods.... Accounting Dissertation Does the activity based costing play a vital part in financial performance?... Introduction: Activity based costing is the assigning of expenses of the measures which is the actual causes of expenses....
17 Pages (4250 words) Essay

What is a Balance Score Card

The main emphasis in management accounting is to establish the relationship between cause and effect of a particular activity.... hellip; Management accounting is a branch of accounting, which is mainly dealing with various managerial aspects mainly handled by the managers within the organization, which is essential for taking appropriate decisions.... Generally Accepted Accounting Principles (GAAP) is dealing with various accounting principles and guidelines for undertaking the implementation of accounting practices....
18 Pages (4500 words) Essay

Costing Principles in Accounting and the New Activity-Based Costing Systems

standard costing systems absorb standard direct materials, standard direct labor and standard company overhead into production costs.... standard costing systems are widely used by manufacturing organisations.... Standard costs are estimated costs that may have a close relationship with budgeted costs.... From the paper "costing Principles in Accounting and the New Activity-Based costing Systems " it is clear that salesmen are tempted to select Services, customers, and territories that yield them the greatest personal commissions, not those that yield the highest profit margins to the company....
7 Pages (1750 words) Research Paper

Financial Accounting: Standardization and Harmonization

It is of utmost importance that financial accounting data be increasingly standardized and harmonized across organizations… It is equally important that manage accounting that are generated MUST vary from one industry or company to another.... Also, it is a MUST that accounting data that is used by managers vary from one business type to another or one business location to The following paragraphs will explain in detail why there MUST be a compulsory implementation of harmonized accounting standards in financial accounting (Leuz, Pfaff, and Hopwood 3)....
15 Pages (3750 words) Essay

Advantages of Strategic Management Accounting

In terms of activity based costing, Tesco can use inventory turnover ratio as a basis for determining how fast inventory is converted to revenues.... In terms of relevant costing for decision making, Tesco Plc should focus on variable costs as major factors in choosing the best alternative in the decision making process.... Strategic management accounting is an emerging field whose boundaries are loose Coad and, as yet, there is no united view of what it is or how it might develop....
14 Pages (3500 words) Essay

Personal Development - Financial Accountant

This shall also help in boosting knowledge about overall company functions and relationship and strength of different departments.... The reason behind why one should choose accounting as a career over careers like investment banking and management consulting is that accounting, as a profession is deemed to be extremely desirable and allows for high compensation and lots of autonomy.... It has been an image… Also, accounting profession associates extremely low levels of stress and enjoys high demand in hiring when compared to all other finance jobs available. As for the purpose of why i chose the career path and the suitability of The study of accounts at an undergraduate level opens the career path to be an accountant....
6 Pages (1500 words) Essay

Re-Marketing of Current Management Accounting Techniques

The research will encompass the background information on the development of Management Accounting from traditional to modern practice.... The following paper “Re-Marketing of Current Management accounting Techniques' suggests that Strategic Management accounting may simply be a re-marketing of currently established management accounting techniques or indeed a concept with no real substance.... hellip; The author states that strategic management accounting is a widely used term that has been derived from combining business strategy and management accounting....
11 Pages (2750 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us