The Use Of Standard Costing As A Control Tool A New Era

4013 words - 17 pages

IntroductionStandard Costing became increasingly widespread at the beginning of the 20th century as a system for determining the manufacturing unit cost of a product, by setting standard rates and required material quantities for various production processes (Hyer & Wemmerlöv, 2002). Drury (2008) state that "Product standard costs are derived by listing and adding the standard cost of operations required to produce a particular product." The popularity of this technique increased significantly in the manufacturing industry, mainly because it could be used as a mechanism for managing cost, which could then be used to set product prices.Over the years, standard costing systems have ...view middle of the document...

Finally, these arguments will be weighed, so as to draw conclusions as to whether standard costing is still relevant in this new international economic climate.What is Standard Costing and how is it used?CIMA (2008) defines standard costing as a "control technique that reports variances by comparing actual costs to pre-set standards, so facilitating action through management by exception. The principle of 'management by exception' which applies to standard costing, allows managers to focus on issues relating to costs that deviate from the pre-set standards. Wood & Sangster (2005) note that actual costs that conform to the pre-set standard require little attention, instead management should focus on those actual costs that produce variances and fall significantly outside the standards.Horngren et al (2002) show that finding the standard cost of a product or service basically requires two groups of calculations. According to Horngren et al, standard costing "traces (a) direct costs to output produced by multiplying the standard price or rates by the standard quantities of inputs allowed for actual outputs produced and (b) allocates indirect costs/[overheads] on the basis of the standard indirect rates times the standard quantities of the allocation bases allowed for the actual output produced." KMPG (2010) argues that under standard costing, indirect cost or overheads related to producing a single unit can be directly attributed to the product cost or included in the product cost by using an absorption technique.The pre-set standards of standard costing give information regarding the cost of producing one unit of a particular good or service. According to CIMA (2008) "a standard cost is a carefully predetermined unit cost, which is prepared for each cost unit. It contains details of the standard amount and price of each resource that will be utilised in providing the service or manufacturing a product." Drury (2008) explains that standard costs can be determined by using historical/prior period data or by using engineering studies. Drury states that "with engineering studies, a detailed study of each operation is undertaken based on careful specifications of materials, labour and equipment and on controlled observation of operations."It is generally agreed that before standard costs can be developed, the organisation's production system should be broken into recurring task. Lucas (1997) contends that the scientific management engineers, who support standard costing, divide production operation into a number of simple repetitive tasks, so as to gain the benefit of specialisation and also minimize time wastage from workers switching from one task to another. By identifying key tasks within the production system, standard costing allows management to pinpoint the specific production areas that might be accountable for those variances. The idea of accountability and dividing the production system into repetitive tasks makes standard costing ideal...

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