In current old ages, assorted tools such as activity-based costing, the balanced scorecard and mark costing have been used in the concern community. However, traditional direction accounting systems continue to be widely applied. One illustration is standard costing, which has been used on a broad forepart during the last century.
The intent of this paper is to analyze the widely usage of standard costing system. Despite it is less relevant than newer accounting methods, standard costing is far from disused. Because of its simpleness, flexibleness and affordability, standard costing remains a favourite cost accounting method among accounting and finance professionals.
In today ‘s clip of rapid technologic alteration, tough planetary and domestic competition, entire cost direction is cardinal to sustained corporate profitableness and fight. The direction focal point today is to minimise cost. The cost leading scheme does non intend via media on either quality or engineering or merchandise distinction. Low costs are no advantage, if the clients are non willing to purchase the merchandise of low cost house. Cost direction has to be driven with client as the focal point.
The survival manner for any company is how to pull off its product/service cost, quality and public presentation. The clients are continuously demanding high quality and better public presentation products/services and at the same clip, they want the monetary values to fall. The stockholders are besides demanding a needed rate of return on their investing with the company. Therefore, cost has become a residuary. The challenge is being able to fabricate or supply service with the stipulated cost model. Thus, cost direction has to be an on-going uninterrupted betterment plan.
In recent old ages, assorted tools such as activity-based costing, the balanced scorecard and mark costing have been used in the concern community ( Kaplan & A ; Cooper, 1998 ; Kaplan & A ; Norton, 1996 ; Ansari et Al… 1997 ) . However, traditional direction accounting systems continue to be widely applied ( Brewer, 2000 ) .
One illustration of traditional direction accounting is standard bing. Standards can be used with either occupation order or procedure bing system to supply of import information for managerial planning, commanding, and determination devising. Standard bing aids in puting budgets and measuring managerial public presentation. The major motivation to utilize standard costing is because it facilitates merchandise bing appraisal ( Ask & A ; Ax, 1997 ) . Ask and Ax ‘s survey is supported by a survey conducted by Puxty and Lyall ( 1989 ) , which reported that 76 per centum of the UK commercial and industrial companies operate a criterion costing system.
Although it is used widely, people late criticize it could non supply the information needed in today ‘s competitory environment. Despite the unfavorable judgment, there are few marks that the usage of standard bing tends to diminish. The study from Ask and AX ( 1997 ) showed that 12.6 % of the companies investigated stated that they would abandon criterions but on the other manus, 9.9 % stated that they would wish to change over to standard bing system.
The History of Standard Costing
The criterion bing system was developed in the early 1900s. Harmonizing to Drury ( 1992 ) , it was the scientific direction rules recommended by F.W. Taylor and other applied scientists. Scientific applied scientists built up information about criterions to put up “ the best manner ” to utilize labour and material resources within fabrication. Engineers used the criterions to supply information for be aftering the flow of work so that the waste of stuffs and labor was minimized. Interestingly, applied scientists did non see criterions as a tool to command fiscal costs at that clip ( Drury, 1992 )
The first ideas of utilizing criterions as a tool to command costs came from G. Charter Harrison, who designed the first criterion bing system. Started in 1911, Harrison worked for the Boss Manufacturing Company, Illinois, in USA – shapers of work baseball mitts. It took him a few old ages before he published the first set of equations for the analysis of cost discrepancies ( Solomons, 1968 )
Harrison was non the lone individual on the standard costing scene. In 1908 and 1909 Harrington Emerson supported the development of an information system specifically directed towards the accomplishment of efficiency aims. Emerson stated that information about criterions allow directors to distinguish discrepancies that are due to governable conditions and discrepancies that are caused by conditions beyond direction ‘s control ( Solomons, 1968 )
Traditionally standard bing systems are used in order to back up the fabrication industry. Today standard costing is widely used by all sorts of industries.
The Purpose of A Standard Costing System:
The intent of cost and direction accounting is to supply fiscal information to directors to assist them to be after activities, command the activities and see the fiscal deductions of any determinations they make take ( Hussey & A ; Hussey, 1998 ) . Standard bing systems provide cost informations that can be used for many different intents.
Ask and AX ( 1997 ) have identified several Fieldss of application when it comes to a criterion costing system. Their study has the undermentioned reasons/purposes why a company may utilize a criterion bing system:
Merchandise Costing 82.4 %
Inventory Valuation 64.8 %
Variance Analysis 56.0 %
Budgeting 45.1 %
Transfer Pricing 31.9 %
Drury ( 1996 ) gives a wider position of the intents. He states that the chief intent a criterion bing system can be used are:
To assist in puting Budges and measuring managerial public presentation.
To move as a control device by emphasizing those activities which do non fit to be after and therefore watchful decision-makers to those state of affairss that many be out of control and in demand of remedial action.
To supply a prognosis of future costs that can be used for determination devising intents.
To simplify the undertaking of following costs to merchandises for stock list rating intents.
To supply a ambitious mark with persons are motivated to accomplish.
There are many advantages with criterions. Calculations are easier made and an effectual public presentation controls are enabled, which provide chance to nest eggs.
Critique Against Standard Costing Systems
Standard costs are major elements within the direction accounting country. They were used when organisations ‘ conditions were stable, standardised merchandises were produced and labour and material costs were the major costs constituents. But today ‘s concern environment is different.
The troubles in the fabrication procedure are increased when merchandises are many and merchandise series are short. ( Ask & A ; Ax, 1997 ) When troubles increase, it has more complicated interpretation of discrepancies. Furthermore, it could be hard to bind the discrepancies to the peculiar individuals or the peculiar countries.
Besides, when the fabrication conditions become more complex, the sum of fixed costs additions. Therefore, fewer chances will act upon the sum costs in the short term. Directors have less interesting to pull off by utilizing traditional thought on how costs are influenced by volume.
As shown above, criterions may be hard to put in today ‘s dynamic conditions. A standard costing system may be expensive to keep and the extra record-keeping may go a load to directors and they lose assurance in the system. ( Hussey & A ; Hussey, 1997 )
Richard Fleischman and Thomas Tyson claimed that standard costing can non supply equal aid in the countries of building scheme and operational direction. ( Fleischman and Tyson, 1998 ) Don Hansen and Maryanne Mowen depict criterion bing system as potentially “ dysfunctional ” . ( Hansen and Mowen, 2002 ) These unfavorable judgments have contributed to the dismissal of standard costing, particularly for big companies that have more sophisticated method such as Activity Based Costing ( ABC ) and mark costing. Mike Lucas even questioned that whether it is still appropriate for college accounting plans to learn this subject. ( Lucas, 1997 )
Global Acceptance of Standard Costing
While faculty members indicating out the failings of standard costing, people observed that this accounting tool continues to be widely used throughout the universe. Surveies showed that in developed states the criterion bing utilizing rate is every bit high as 73 % in the U.K. and 86 % in Japan. ( Garg, Ghosh, Hudick and Nowacki, 2003 )
More specifically76 % of 303 comptrollers in the U.K. and 73 % of 85 finance and accounting specializers in New Zealand use standard costing. ( Guilding, Lamminmaki and Drury, 1998 ) The writers besides found that comptrollers viewed modern costing and production direction tools as holding no impact on how widely standard costing and discrepancy analysis are used. A survey by Maliah Sulaiman, Nik Nazli and Norhayati Mohd Alwi of companies making concern in Malaysia found similar widespread airing and continuity of standard costing: 70 % of 66 local houses and 76 % of 21 Nipponeses are utilizing standard costing.
These surveies reveal that standard costing does non overemphasise cost control ; nevertheless, it is linked to choice direction. In add-on, the Lucas and Sulaiman surveies have shown that companies use historical public presentation alternatively of preset technology criterions on existent costs. Alternatively of utilizing newer and costlier systems, companies chose to reconfigure bing system with more precise strategies, connoting that houses have adapted standard bing to their specific demands and have non abandoned it.
Swiss Chalet Standard Costs System:
In order to show that criterion costing is far from disused. I examined the criterion bing system at Swiss Chalet, one of the biggest Canadian eating house ironss. The gathered information of this survey consists of in-depth interviews with employees working with standard bing at different divisions within Swiss Chalet. The survey about the criterion costing in U.K. , Dubai and Malaysia is besides used.
First opened in 1954, Swiss Chalet now has more than 190 eating houses across Canada and United States functioning their signature rotisserie poulet and a assortment of other menu points.
In the beginning of each month, Swiss Chalet ‘s country trough will direct criterion costs to each Swiss Chalet ‘s shop. The criterion costs are generated through historical informations and country director ‘s analysis based on each shop ‘s current state of affairs. Then, direction in each shop can project stuffs, labour and overhead costs by reexamining the criterion costs established for each of these cost elements. Then computing machine generate the discrepancies and do directors acknowledge the differences between the existent activities and resource ingestion and the expected activities and resource ingestion. When the discrepancy is important, this is a signal for probe, Managers will seek to detect the cause and exert influence to rectify it.
Therefore, “ cost control and public presentation rating ” is the chief intent of Swiss Chalet ‘s Standard Costing System. Harmonizing to Mann-Whitney U trial Statistic13, stock list costing is the cardinal map of standard bing for industries in U.K, Dubai and Malaysia. Besides, Mann-Whitney U trial suggests that the industrial-sector companies in U.K. use standard costing to a greater extent than the service sector for the maps of cost control and public presentation rating, bing stock lists and calculating merchandise cost for determination devising. Besides, in merely one case has this form reverted toward the service sector: the usage of standard costing as an assistance to budgeting. These findings are consistent with those of other surveies of industrial sector companies in Malaysia and the U.K. ( Marie & A ; Rao, 2010 )
Swiss Chalet ‘s direct stuff constituents have three classs: nutrients, spirits and disposals. Foods include chicken, murphies, ribs, and veggies. Etc. Liquor includes vino, spirit and other non-alcohol drinks. Disposals include nutrient boxes and bags to wrap nutrient. Besides, the standard cost of non-value-added stuffs such as price reduction stuffs, nutrient wastes and rescindable orders are besides included for the intent of decrease or riddance. When country troughs determine the criterion cost, historical cost, shop ‘s current public presentation and cost-benefit tradeoffs are involved in doing quality determinations. When all measure and monetary value information has been gathered, component measures are multiplied by unit monetary values to give the entire cost of each constituent. These sums are summed to find the entire standard stuff cost of one unit of merchandise and the entire standard stuff cost. Information about direct stuff of each constituent, their specifications ( including quality ) , their measures and entire standard stuff cost are listed on a measure of stuffs.
This “ norm of historic use ” method is consistent with statistics of service sectors in Dubai, U.K. and Malaysia. Harmonizing to Mann-Whitney U trial Statistic, 76 % of service sector in Dubai and 63 % of service sector in Malaysia use “ norm of historic use ” to put up labour and material criterions. On the other manus, about nine out of 10 industrial sector respondents in Dubai employed criterions based on design/engineering surveies, which is comparable to Nipponese companies in Malaysia ( 81 % ) . These houses appear to be significantly more scientific in their attack to criterions puting compared to the service sectors, which preponderantly used “ norm of historic use method ” .
The processs for developing labour criterions are similar to those used for stuff criterions in Swiss Chalet. Swiss Chalet has four types of plants in the forepart of the house: waiters, hosts, directors and saloon stamps. They besides have three types of people in the kitchen: cooks, line cooks and pre cooks. The standard costs of each type of worker in each specific clip scope are identified. Because they are in the eating house concern, labour demand is different during the different period of the twenty-four hours. Therefore, their labour criterions are specifically identified in each hr. Their directors ‘ wages are besides counted into the labour criterion costs although they are fixed overhead cost. Labor rate criterions reflect the rewards and fringe benefits paid to employees. Because employees in the same place are paid different pay rates based on their experiences in the eating house concern, a leaden mean rate is computed and used as the criterion. After labour undertakings are analyzed, an operations flow papers is prepared that lists all the necessary activities and labour costs in each clip scope.
Swiss Chalet shop has two types of operating expense costs: public-service corporation costs and care costs. ( Managers ‘ wages are included in the labour costs ) . Utility costs include rent, gas and hydro, etc. Care costs include equipment fix budget, healthful service and plague controls, etc. Area directors use historical informations, shop state of affairs and market monetary value to find the overhead criterion costs.
Swiss Chalet ‘s directors review the standard every month. Slightly more than half of Dubai industries ( 52 % ) behavior reviews biyearly, consistent with Nipponese respondents in Malaysia ( 55 % ) . On the other manus, domestic Malaya houses in the U.K. were disposed to reexamine their costing criterions yearly at a rate of 35 % and 68 % , severally. ( Marie & A ; Rao, 2010 )
Shop directors do the stock list count every hebdomad and so input direct stuff cost they used of each constituent, their specifications ( including quality ) , their measures and entire standard stuff cost into the computing machine system. The computing machine system generates the monetary value discrepancy and measure discrepancy.
Shop directors normally can non make much about the monetary value discrepancy because they are non able to command monetary values. Head office has buying contracts with their providers with fixed monetary values in the annual footing. The lone monetary value they can command is vegetable monetary values, which have seasonal fluctuation. Directors are able to act upon the monetary value harmonizing to the monetary value discrepancy.
Measure discrepancies are considered the duty of the individual in charge of the kitchen. When the measure discrepancy is excessively large, directors have to believe about the efficiency of the stuff use, weather experient employees are good allocated in different displacement and conditions farther preparation should be provided.
When employees start to work and when they leave the shop, they input their watchword into the computing machine system. Computer system automatically enter their working hours and generates labour rate discrepancy and labour efficiency discrepancy.
If the labour cost is bigger than 29 % of the entire costs, caput office will give a warning to the shops, demanding them to cut down the labour costs. Therefore, directors have to equilibrate the usage of experient workers and inexperient workers in a specific undertaking by utilizing labour efficiency discrepancy and labour rate discrepancy. Using extremely skilled extremely paid persons for lower-level occupations could do an unfavourable labour rate discrepancy, accompanied by a favourable labour efficiency discrepancy.
Therefore, Swiss Chalet examines discrepancy “ where the discrepancy exceeds a given per centum of criterion ” . In Dubai, 39 % of industrial companies and 50 % of service companies base their costing determinations on “ managerial judgement ” , compared to approximately half of U.K. companies and one 4th of local and Nipponese companies in Malaysia. However, 35 % of houses in Dubai ‘s industrial sector and 29 % in its service sector answered when the discrepancy exceeded a given per centum of criterion, which is similar to the rates found in the Malaysia and U.K. surveies. ( Marie & A ; Rao, 2010 )
II Usefulness and effectivity of the System:
The major advantage of standard cost system in Swiss Chalet is that it highlights and allows direction to pull off by exclusions, that is, it allows direction to concentrate on the countries where there are inefficiencies. It besides allows company direction to understand the quality expected and costs that will be incurred in the readying of each dish and what impacts divergences from these criterions will hold on costs and net incomes. When the discrepancy is important, this is a signal for probe, Managers tries to detect the cause and exert influence to rectify it. In the Swiss Chalet shop I visited, costs are under control ; productiveness is high ; workers are accomplishing fillips based on squad activity ends and employee morale is high in a work environment typically viewed as boring.
The system is extremely controlled and automated. The procedure is effectual and the criterions they set are appropriate and attainably. Although their criterions are developed from past and current information, environmental, seasonal and economic factors are considered for the period in which the criterions are to be applied. Swiss Chalet ‘s stuff, labour and overhead criterion costs are changed every month. For illustration, late, Swiss Chalet eliminated many non value added labour motions, their labour clip criterions changed really shortly consequently.
Swiss Chalet ‘s criterions can be reached or somewhat exceeded about 60 % or 70 % of the clip with sensible attempt by workers. Their criterions let for normal, ineluctable clip jobs or holds. Their criterions represent an come-at-able challenge and are able to actuate workers ‘ public presentation and at finding how efficaciously and expeditiously workers are executing their undertakings.
Under current system, country directors are the lone people who do the criterion costs puting. I believe that country directors could collaborate with buying director, comptrollers, selling directors and shop directors to find which picks are most appropriate. The cooperation will assist the company better balance the interrelatedness of cost, quality, measure and merchandising monetary value.
Under the current system, standard costs of each type of worker in each specific clip scope are used to cipher the entire labour criterions. However, workers wages are different even in the same place because their experiences are different. Therefore, each person ‘s salary and single Numberss in one specific clip scope used to cipher the standard labour costs should be identified for directors better understand the criterions and better better their labour agreement and better their labour efficiency.
Computer System alteration:
Swiss Chalet ‘s current computing machine system is good, but still non extremely automated. They still use facsimile to pass through informations and information within the organisation are non extremely shared within one portal. Therefore, I believe Enterprise Resource Planning System ( ERP ) will do their work procedure more efficaciously.
EPR system provides a much higher degree of truth to garnering cost information. With most fabrication procedures being automated and operated with small direct labour, ERP system has the advantage of maintaining an accurate record of overhead cost pools at all degrees in an organisation. ERP has greater capacity to accurately apportion costs and it is of import for developing accurate criterions. Standard costs can be prepared with, for illustration, the sub-module mySAP.com Financials under ERP system.
Intermountain Health Care, Inc. ‘s Standard System
Harmonizing to Mr. W.V. Rosqvist ‘s research paper “ Intermountain Health Care, Inc, ( IHC ) Satandard Costing System Methodology and Implementation ” , the IHC Standard Costing System is able to pull strings the process costs in any manner desirable to supply meaningful groupings for analysis. The Standard Costing System provides hospital direction with a tool for meeting increased cost force per unit areas in the wellness attention environment. The system is utile for pricing services, but it is besides of import to supervise productiveness and analyze costs and profitableness.
IHC is a not-for-profit infirmary concatenation with 22 infirmaries in the intermountain country and caput office is in Salt Lake City. They have a complex attack to find elaborate criterion costs for every process in the infirmary. IHC ‘s criterion costing system was designed to associate the infirmary ‘s fiscal direction and instance mix coverage system to supply important information in the country of followers:
Cost/Profit Surveies: the ability to find cost and net income at each of degrees, such as patient, doctor, medical forte, remunerator and employer.
Selling: to do complex determinations sing the competitory market forces such as pricing, undertaking and physician retirement. The analysis gives hospital the advantage to find the fiscal impact of alterations in volume.
Departmental Productiveness: to supervise the section public presentation to assist discrepancy analysis and end scene.
Use of Hospital Service: the ability to change use, which depends on the ability to analyse current forms and associated costs.
Cost Comparison: To compare costs to other infirmaries to assist directors to place and larn the efficient methods.
Competitive Analysis: To analyze rival information and do sensible judgement of its costs. It will let a important position of the impact of monetary value completion on all the rivals. It will assist IHC to find the extent to which it should vie on monetary values with other infirmaries and with untraditional wellness attention suppliers, such as outpatient surgery centres.
The IHC attack to standard bing provides elaborate costs for every single charge point in the infirmary. Fixed and variable costs are maintained for every point in wide classs: labour disbursal, supply disbursal, depreciation and infirmary operating expense.
After the execution, their standard costing system is able to: supply full criterion fixed and variable costs for direction intent in doing pricing and selling determinations ; keep a direction coverage system compatible with bing system ; supply an attack to compare infirmaries and sections ; supply truth while leting easy and rapid care. ( M. V. Rosqvist )
The Future of Standard Costing:
Harmonizing to Cheatham and Cheatham ( 1996 ) , many comptrollers do non cognize that a redesigned criterion bing system can supply the of import information that they need and updating their system is an easier procedure than following a new system. They besides point out that standard bing system combines managerial, fiscal and operations accounting, which make it as a control system. But the possible replacing is merely cost accretion system.
Critics against the criterion bing system questioned whether the system is utile in the fabrication system of today. As we demonstrated above, it is still a widely used method, due to the fact that it provides cost information for many different ways in add-on to be control. A batch of companies adapted their criterion bing system to describe on these variables that peculiarly of import to them. In companies where an activity-based system is implemented, standard costing is still indispensable when it comes to commanding the costs of unit-level activities.
Other unfavorable judgment comes from that overemphasis is on the monetary value and efficiency, which would do quality aside. Besides, volume discrepancy to mensurate use of capacity ignores overrun and unneeded build-up of stock list. In this state of affairs the fact that discrepancy analysis is non “ locked in ” to a set of variables is ignored. Used variables can be changed when the demand arises. Examples of this are presented below. ( Cheatham & A ; Cheatham, 1996 )
To utilize criterions on the maps of natural stuff ordination and stock list degrees, which give information about the effectivity of providers. Because the aim is to present orders as placed, any discrepancies are unsought.
Monetary value discrepancies can be combined with a quality discrepancy to forestall buying directors from merely concentrating on monetary value but do non pay attending to quality.
Natural stuffs stock list discrepancies indicate an stock list build-up, because more stuff purchased than used, by reverted conditions. This is in line with a just-in-time theory.
Further unfavorable judgment is about the non-focus of uninterrupted betterment. But, criterions based on technology surveies or historical informations are non a necessary portion of a criterion costing system because criterions can be changed by a batch of methods. Examples are listed as below. ( Cheatham & A ; Cheatham, 1996 )
Use last period ‘s consequences as criterions. The last period ‘s consequence has to be representative ; otherwise it needs to be revised. It is besides accomplishable to utilize a base period that comparings are made.
Use benchmark as something outside companies. To compare with rivals or with the leader of the industry.
Use predetermined cost decrease by cut downing the criterion cost for every period by a preset sum to accomplish changeless betterment.
Finally, the coverage system of the criterion bing system may be revised. In the traditional manner internal completion frequently arises. By revising the coverage system, cooperation among workers, directors and sections can be supported.
Despite it is less relevant than newer accounting methods, standard costing is far from disused. However, redesign and update the criterion bing system to accommodate the new environment may be necessary. Because of its simpleness, flexibleness and affordability, standard costing remains a favourite cost accounting method among accounting and finance professionals.