Standard cost are predetermined cost that are normally expressed on a per unit footing, they constitute a carefully formulated estimation of what future costs should be, based on a coveted degree of productiveness and procedure efficiency and a set of premise about the operating environment. ( Oliver L 2000 )
Why utilize criterion cost?
Standard costs are largely used in fabricating companies chiefly as a direction control system whereby they help directors and the people involved in the determination doing procedure to do sound determination particularly with respects to be. Management control is the procedure by which directors influence other members of the administration in implementing the organizational scheme.
The aims of any concern procedure in the information age is to last on the market increase their net income border and increase the concern market portion it follows that for concerns to achieve these aims the concern must seek and maintain costs every bit low as they perchance can and bring forth every bit much gross as the concern can, if the gross is greater than the cost of bring forthing the goods sold the concern will do a net income therefore carry throughing their aim.
Standard cost as a cost control mechanism
Standard cost system provides directors with a mechanism to command costs in a procedure known as direction by exclusion, direction by exclusion is the procedure by which directors carefully estimate the measure of stuffs and the monetary values of the factors of production required to bring forth each unit of end product and so put a criterion or benchmark are rigor but come-at-able and leave the production to run on its ain and merely intervene when the procedure is non traveling harmonizing to program. ( Wood F 2007 )
Figure 1.1 shows the criterion costs and measures of each factor input required to bring forth gilded practical yoghurt. The hebdomadal capacity is 1000 units therefore the standard hebdomadal cost for direct stuffs is ?1600, ?800 for labor and ?260 for entire operating expense. These criterions are communicated to the production staffs, the purchase section, human resource direction section and every other attached section of the concern as such each section has a mark to which it must endeavor to fulfill the public presentation of each section will be judged based on how good the criterions are observed favorable disagreements indicate first-class direction therefore there will be no demand for the directors intercession other than to promote the good work.
Alternatively directors can airt their attempt and clip perusing schemes that have a important consequence on the concern future growing such as developing a balanced scorecard to help them to aline the concern day-to-day activities to the overall corporate scheme so that they can give the concern a competitory advantage on the market by prosecuting those factors that are considered critical for the company ‘s future nutriment.
Adverse disagreements will nevertheless deserve the director ‘s intercession, for case if the employees resulted into negative behavior such as late approach, absenteeism, accidents or increased labour turnover because of low degrees of motive the concern labor cost will hit up and ensue into inauspicious discrepancies the direction will carry on an probe to track down the root cause of the labour discrepancy, for illustration low motive of line workers and disciplinary steps will be put in topographic point for case the human resource section can revolve the workers to give them a assortment of work Rather than making the same old drilling insistent occupation it could be the criterions set are excessively difficult to achieve in which instance the directors will be required to revise the criterions, psychological science surveies has shown that employees will be motivated to exercise their attempt when the marks are slightly in between that means the marks should non be excessively easy to achieve and should be highly hard to achieve.
Motivation can be intrinsic or extrinsic, intrinsic in the sense that it comes out of the person it is non influenced by stuff or economic wagess, extrinsic in the sense that it is caused by mercenary wagess such as money. ( Armstrong, M. 2006 ) The direction will happen out what type of motive is low and honor the employee consequently, for illustration the employee can be paid based on the figure of end product produced given a limited figure of stuffs, in other words the direction can revise and put new criterions and reward employees who meet these criterions. This will actuate the workers to exercise their attempt to run into this criterion accordingly better labor productiveness and lower the unit cost of production. Once that is achieved the directors can go forth the production to run on it ‘s and concentrate on other positions of the concern.
Discrepancies can be caused by stuffs every bit good if the purchase section decided to buy from another provider at a lower cost it might turn out that the stuffs are of deficient quality and therefore workers on the production line may be required to utilize up more than the set measure criterion to bring forth each unit of end product. Again, directors will follow the root of this discrepancy and might make up one’s mind to construct up confederations with providers and follow systems such as merely in clip stock control system where the providers will be required to present the stuffs merely as they are needed by the production section as opposed to traditional stock control systems. Figure 1.2 shows a comparing between merely in clip stock control system and traditional stock control system, by following merely in clip sock command the concern can accomplish rather a considerable decrease in cost of production for case the concern can salvage on storage cost and deteriorated stock, the concern hard currency flow can better in that less money will be tired up in natural stuffs. ( Muller M 2003 )
Compared to other cost methods, stand cost is by far the most economical system as it delivers comparative consequences at lower cost than would existent cost system. Standard bing system is besides easy to implement in the administration easy to understand and normally meets consensus at every degree of the administration it can be used together with other production methods to cut down costs of production. ( Wood F 2007 )
“ David Lyall and Carol Graham stated that more than 90 % of 231 companies surveyed in the U.K. use standard bing for cost control purposes. Furthermore, they found that 63 % of the directors utilizing this technique reported being pleased in footings of its decision-making support
Many concern still utilize standard cost system in order to command costs and to assist the brand cost determination and because it does non demand excessively much of the directions clip, the directors can concentrate on schemes that help the concern generate gross and gives the concern a competitory advantage in the information age.