Cost AND PERFORMANCE MANAGEMENT
Table OF CONTENTS
1.0 Introduction
2.0 PURPOSES OF STANDARD COSTING
2.1 Decision Making Purposes
2.2 Challenging Target
2.3 Puting Budgets
2.4 Control Device
2.5 Inventory Evaluation
3.0 ADVANTAGES OF STANDARD COSTING
3.1 Budgeting
3.2 Inventory Costing
3.3 Overhead Application
3.4 Price Formulation
3.5 Efficiency
3.6 Cost Control
3.7 Motivation
4.0 LIMITATION OF STANDARD COSTING
4.1 Restrictions In Applicability
4.2 Reactive Nature
4.3 Costly
4.3 Environment Consequence
5.0 Decision
6.0 Mention
7.0 APPENDIX
1.0 Introduction
A standard cost is an estimated criterion for each cost component of the jutting unit costs, such as the standard resource use and standard resource monetary values. Standard costing is chiefly used to value stock lists and cost production and to move as a control. The utilizations of standard costing can to value cost production and stock lists for cost accounting aim. In add-on, utilizations of standard bing it can be used a control device by set up criterions and comparing existent costs with the expected costs, hence some organisation may out of control in their highlighting countries ( Manjumath and Andrew, 2011 ) .
Harmonizing to Charles ( 1998 ) , standard costs are predetermined mark costs, and assist to place the job on the evaluate public presentation and budget procedure. In a criterion cost system, merchandise costing is implemented by utilizing preset criterion costs for direct labour, stuff, and overhead. Standard costs are developed on the footing of historical cost informations adjusted for expected alterations in the merchandise, technology estimations, production techniques, and other considerations. Besides, standard costing can be used to supply a prediction of future costs to be used in determination devising state of affairss and lead on possible ways of bettering efficiency.
Standards have to be set for the monetary values and measures of services, stuffs, and labor to be spent in executing each operation relate with a merchandise. Product criterion costs are show out the list and adding the criterion costs of operations demands to bring forth specific merchandises. To methods are used for puting standard costs. First, past historical records can be used to measure material use and labor. Second, criterions can be set due to technology surveies. Engineering surveies have mention out of each operation detailed research is undertaken under controlled conditions, due to high degrees of efficiency, to happen out the measures of stuffs and labor required. Target monetary values are so applied due to efficient buying to happen out the criterion costs ( Rosalie, 2011 ) .
2.0 PURPOSES OF STANDARD COSTING
2.1 Decision Making Purposes
As mentioned by Drury ( 2012 ) , the criterion bing represents a anticipation of future costs and therefore relevant beginnings of information for determination devising intents. Besides, the criterion costing are often used for pricing determination since it imply future mark costs based on the riddance of evitable inefficiencies. When the company under well-organized operating, it may holding a larger competitory advantage in the bing markets which comparing to those company fail to extinguish the evitable costs since standard costs provide valuable information for pricing determination. It is hence unwise to presume that inefficiencies are recoverable within the command monetary value. In other manus, the company can foretell its merchandise costs can concentrate on the most profitable stuff mix proportion and avoid possible loss-making activities. So, the criterion costing is play an importance function in the determination devising intents.
2.2 Challenging Target
Drury ( 2012 ) stated that, supplying a ambitious mark and such mark can hold a good consequence on motive. In contrast, demotivational consequence will go on when the disputing fail. The practical trouble with such an attack lies in equilibrating necessary direction freedom against slack public presentation. It seems to be the instance that most organisations find this equilibrating act about impossible to accomplish, which coupled with force per unit area to utilize limited fiscal resources efficaciously, will do acceptance of a ‘strict’ attack to command.
2.3 Puting Budgets
Harmonizing to Drury ( 2012 ) , the criterion costing was contributed in the puting budgets and measuring managerial public presentation. The quality of budgetary will be affected by the relevant and dependable beginning of information or information in the criterion costing. Besides, the information or information which criterion costs provided can easy change over budgeted production agenda into physical and pecuniary demands for stuffs, labor, operating expense and other services. Budgetary readying clip is well reduced if standard costs are available because the standard costs of operation and merchandises can be readily built up into entire costs of any budgeted volume and merchandise mix. Furthermore, standard cost besides provide a foundation for
gauging the existent public presentation cost in the hereafter since criterion costs are used as a close estimate to existent costs.
2.4 Control Device
One of the major intents of a criterion costing system is to move as a control device said by Hussey and Hussey ( 1998 ) . Since the procedure of end product will continually supervise by the preset degree. So, when there is a divergency between the existent and standard degree, the control device will get down the disciplinary actions ( Appendix 1 ) . Drury ( 2012 ) stated that, with a criterion bing system discrepancies are analyzed in great item such as by component of cost, and monetary value and measure elements.
2.5 Inventory Evaluation
Segelod and Carlsson ( 2010 ) argue that, the criterion costs simplify the undertaking of following costs for inventory rating intents. The stock lists and production cost recorded at standard cost and a transition to existent cost, it is made by composing off all the discrepancy as a period cost. When there is failure to implement the criterion costing system, it is necessary to keep the records of existent costs for each single stuff in order to find the rating of finished goods and work in advancement stock list since the existent costs must be maintained at demand of standard cost ( Drury, 2012 ) . So, a well-organized in the criterion bing system does non name an organisation to maintain shop records and merchandise costs at existent costs.
3.0 ADVANTAGES OF STANDARD COSTING
3.1 Budgeting
As mentioned by Eric ( 2011 ) , a budget is frequently unagitated of standard costs, because it would be hard to consist in the accurate existent cost of goods on the twenty-four hours the budget is confirmed. In add-on, because of a chief petition of the budget is to compare it to existent consequences in back-to-back periods, so that criterions used will maintain looking in fiscal studies by the budget period.
3.2 Inventory Costing
Due to Eric ( 2011 ) , standard costing are really easy to demoing out the period terminal of the stock list balances study. The consequence of study might non accurately adaptation the stock list existent cost, nevertheless it is near. If the existent costs are invariably altering, it may be indispensable to update criterion costs often. It is simple to turn up the costs for the highest dollar faculty of stock list on a frequent footing, and retreat lower value points for infrequent cost revision.
3.3 Overhead Application
If the clip is excessively long sum-up of the existent cost of the cost assigned to the stock list database, so it can utilize a standard application of rate alternatively to set the rate for every few months to maintain it near to the existent cost ( Nayab, 2010 ) .
3.4 Price Formulation
Harmonizing to Nayab ( 2010 ) , an organisations trade with tradition merchandises, so it can utilize standard costs to compose the jutting cost with attention deficit disorder on a border of client require. This might be really complex system, but the alteration in the gross revenues section to utilize some of the cost will depend on the client to order the figure of units database. This system can besides see to altering the organisations production costs at every different volume of the degrees, as this may necessitate less expensive for usage and production run longer. Nowadays, many organisations are utilizing the criterion cost to computations and budgets to put up the monetary value of the merchandise ; therefore it is easy to understand that criterion costing will happen some utilizations for the foreseeable hereafter.
3.5 Efficiency
Harmonizing to Nayab ( 2010 ) , the criterion bing methodological analysis of comparing standard costs with existent costs allows a reliable buttockss of the public presentation of assorted cost centres. The replace method of finding public presentation by comparing costs in different periods is mistake as it does non see the varying state of affairs during both periods. Based on Eric ( 2011 ) , standard bing systems ever prove less resource ingestion than the existent cost of comparable system. Actual bing system requires a batch of calculating and the increasing sum of informations, it can decelerate down the public presentation of the computing machine system standard cost system is non in the manner. Although the system is dawdling production is chiefly caused by physical labour done some jobs, slower system may turn out to be harmful to trust on computer-controlled fabrication.
3.6 Cost Control
There are many companies are utilizing standard costing system, because it can provides information that the direction can hold cost control. Kumar ( 2008 ) argue that accounting system can tracked existent costs in study entries to accumulation liabilities for the labour payment and the stuffs purchase, entries to other cost record, and entries accumulated depreciation record which have involve in the production. Therefore, a criterion bing system can enter both budgeted figures and existent costs incurred in the production. By comparing the existent cost with criterions cost, if there is a discrepancy, the direction can take immediate action to command the jobs. Since standard costing can supply such information, standard costing is an of import technique of cost control. The advantage of a criterion costing system is that the general leger system will car follow up the necessary information to supply more comprehensive public presentation studies to expose the cost discrepancies ( Caplan, 2010 ) .
3.7 Motivation
To develop a criterion costing system, it require all the engagement of all the direction degree ( upper, in-between and lower degrees ) and subsidiaries of the company. So that this creates motive for the employees because they feel there are portion of the system. Following, the criterions fixed should be achieved by the employees and keeping or bettering the quality of the merchandise. All the programs can be framed to honor with suited inducements. The inducement system can actuate the employees to accomplish or even higher degrees expected of them. This increases efficiency, effectivity and productiveness of the whole production ( Charles et al. , 2011 ) .
4.0 LIMITATION OF STANDARD COSTING
4.1 Restrictions In Applicability
Debarshi Bhattacharyya ( 2012 ) argues that, the criterion costing system is non effectual for the organisation which deals with non-standardized merchandises which change harmonizing to the client particular and demand and demands. Customization based on client demand signifies each occupation requires a different set of work elements and constituents, and changing disbursals. Therefore, the criterion costing system is merely applicable for the standardised merchandises which consistent and insistent procedure.
4.2 Reactive Nature
As mentioned by Nayab ( 2010 ) , the criterion bing methodological analysis tends to respond to issues instead than take a proactive attack to forestall jobs. Since the disciplinary action is based on the consequence of discrepancy analysis to take action but all the discrepancy analysis is post mortems on past events so the criterion bing system allows for the production procedure to run its inefficient class. Therefore, the criterion costing is more suited as a guideline for the standardised merchandises and reiterating state of affairs in the hereafter procedure which is non ever a contemplation of world.
4.3 Costly
Bhabatosh Banerjee ( 2006 ) said that, the procedure of criterion bing system requires high grade of proficient accomplishment to show high quality of work therefore it will higher charges. So, for those little organisation may happen it hard to set up standard bing owing to their limited fiscal resources. However, one time the system is established, the consequences to be achieved will far transcend the high initial cost.
4.3 Environment Consequence
Due to environment alteration, in volatile conditions with quickly altering method, rate and monetary values, standard rapidly become out of day of the month and therefore lose their control and motivational effects ( Jill et al. , 2012 ) . This can be taking to client dissatisfaction with the company and loss of good will. Although, the jobs can work out by usage of planning and operational discrepancies but this involves more subjectiveness and more work.
5.0 Decision
In the decision, based on the intents, advantages and disadvantages, it is of import that a company have to utilize standard costing system. Because the criterion bing system can supply standard public presentation information which they can easy compare to the existent public presentation. If the discrepancy is favorable, it could be the direction did a great occupation and the employees perform expeditiously. On the other manus, if the discrepancy is inauspicious, it could be the direction deficiency of control about the operation, deficiency of quality control and others causes. So the discrepancy can easy shows whether the company perform in a good path or bad. The company can utilize the discrepancy to analyze and take immediate disciplinary action to better the existent public presentation. Standard bing system can supply discrepancies to the direction for probe of the operation.
6.0 Mention
- Bhabatosh Banerjee. ( 2006 ) . Cost Accounting. 12th Edition. Page 726-729. Prentice-Hall of India Pvt.Ltd. [ Online ] Available from: & lt ; hypertext transfer protocol: //books.google.com.my/books? id=mNb_orFfwXQC & A ; pg=PA727 & A ; dq=disadvantages+standard+costing & A ; hl=en & A ; sa=X & A ; ei=gyfeVPXGCKfHmwWm4oLwBQ & A ; ved=0CB0Q6AEwAA # v=onepage & A ; q=disadvantages standard bing & A ; f=false & gt ; [ Accessed February 11, 2015 ]
- Caplan, D. ( 2010 ) .Management Accounting: Concepts And Techniques, Part 3: Merchandise Costing And Cost Allocations.[ Online ] Available from: & lt ; hypertext transfer protocol: //classes.bus.oregonstate.edu/spring07/ba422/Management Accounting Chapter 10.htm & gt ; [ Accessed 13 February 2015 ]
- Charles T. Horngren, Srikant M. Datar and Madhav V. Rajan, 2011. Cost Accounting: A Managerial Emphasis. 14th Edition.
- Charles, W. ( 1998 ) .Management and Cost Accounting: Standard Cost System. Prentice Hall. [ Online ] Available from: & lt ; hypertext transfer protocol: //www.referenceforbusiness.com/encyclopedia/Con-Cos/Cost-Accounting.html & gt ; [ Accessed 13 February 2015 ] .
- Debarshi Bhattacharyya. ( 2011 ) .Management Accounting: For University of Delhi. Page 96-98. Pearson Education India. [ Online ] Available from: & lt ; hypertext transfer protocol: //books.google.com.my/books? id=-1PGz0COWbUC & A ; pg=PA96 & A ; lpg=PA96 & A ; dq=standard+costing+Limitations+in+Applicability & A ; source=bl & A ; ots=VNje_DeIUu & A ; sig=YBB2CiUVCtHwOycZzGAupBbZoIw & A ; hl=en & A ; sa=X & A ; ei=i57dVNC0GdiVuASBkYGoAQ & A ; ved=0CEsQ6AEwBw # v=onepage & A ; q=standard % 20costing % 20Limitations % 20in % 20Applicability & A ; f=false & gt ; [ Accessed February 11, 2015 ]
- Drury, C. ( 2012 ) . Management and Cost Accounting. 8th Edition. Page 423-431. Cengage Learning EMEA.
- Eric Dontigney, ( 2011 ) .The Advantages Of A Standard Cost. Demand Media. [ Online ] Available from: & lt ; hypertext transfer protocol: //yourbusiness.azcentral.com/advantages-standard-cost-26494.html & gt ; [ Accessed 14 February 2015 ] .
- Hussey, J. and Hussey, R. ( 1998 ) .Cost and Management Accounting.Palgrave Macmillan. [ Online ] Available from: & lt ; hypertext transfer protocol: //www.cengagebrain.co.nz/content/9781408049044.pdf & gt ; [ Accessed February 8, 2015 ]
- Jill, C, Andrew, H and Hussey, R. ( 2012 ) . Business Accounting: An Introduction to Financial and Management Accounting. Page 364-376. Palgrave Macmillan. [ Online ] Available from: & lt ; hypertext transfer protocol: //books.google.com.my/books? id=Hd0cBQAAQBAJ & A ; pg=PA372 & A ; dq=disadvantages+standard+costing & A ; hl=en & A ; sa=X & A ; ei=gyfeVPXGCKfHmwWm4oLwBQ & A ; ved=0CCMQ6AEwAQ # v=onepage & A ; q=disadvantages standard bing & A ; f=false & gt ; [ Accessed February 11, 2015 ]
- Manjunath H. S. Rao and Andrew S. Bargerstock. ( 2011 ) .Researching the function of standard costing in thin fabrication Enterprises: A Structuration Theory Approach. Management accounting quarterly. Vol.13 ( 1 ) . Page47-60. [ Online ] Available from: & lt ; hypertext transfer protocol: //www.imanet.org/docs/default-source/maq/maq_fall_2011_rao-pdf.pdf? sfvrsn=0 & gt ; [ Accessed 13 February 2015 ] .
- Nayab ( 2010 ) .What Are the Top 3 Disadvantages of Standard Costing. [ Online ] Available from: & lt ; hypertext transfer protocol: //www.brighthub.com/office/finance/articles/82427.aspx & gt ; [ Accessed February 11, 2015 ]
- Nayab, N. ( 2010 ) .Standard costing: A Quick Expression at the Top Advantages. Bright Hub Inc. [ Online ] Available from: & lt ; hypertext transfer protocol: //www.brighthub.com/office/finance/articles/82421.aspx & gt ; [ Accessed 14 February 2015 ] .
- Rosalie C. Hallbauer, ( 2011 ) .Standard Costing and Scientific Management. Florida International University, Vol.5 ( 2 ) . [ Online ] . Available from: & lt ; hypertext transfer protocol: //www.accountingin.com/accounting-historians-journal/volume-5-number-2/standard-costing-and-scientific-management/ & gt ; [ Accessed 13 February 2015 ]
- Segelod, E and Carlsson, L. ( 2010 ) .Accounting, Business & A ; Financial History:The outgrowth of unvarying rules of cost accounting in Sweden 1900–36. Journal of Business Economics. Vol.20 ( 3 ) November. Page 327–363. [ Online ] Available from: & lt ; hypertext transfer protocol: //perpus.upstegal.ac.id/v4/files/e_book/57138300.pdf & gt ; [ Accessed February 8, 2015 ]
7.0 APPENDIX
Appendix 1: Control System
