A report on the Implementation of Standard Costing

A report on the Implementation of Standard Costing In current years, various tools such as activity-based costing, the balanced scorecard and target costing have been used in the business community. However, traditional management accounting systems continue to be widely applied. One example is standard costing, which has been used on a wide front during the last century. The purpose of this paper is to examine the widely use of standard costing system. Despite it is less relevant than newer accounting methods, standard costing is far from obsolete. Because of its simplicity, flexibility and affordability, standard costing remains a favorite cost accounting method among accounting and finance professionals. Introduction: In today’s time of rapid technologic change, tough global and domestic competition, total cost management is central to sustained corporate profitability and competitiveness. The management focus today is to minimize cost. The cost leadership strategy does not mean compromise on either quality or technology o r product differentiation. Low costs are no advantage, if the customers are not willing to buy the product of low cost firm. Cost management has to be driven with customer as the focus. The survival way for any company is how to manage its product/service cost, quality and performance. The customers are continuously demanding high quality and better performance products/services and at the same time, they want the prices to fall. The shareholders are also demanding a required rate of return on their investment with the company. Thus, cost has become a residual. The challenge is being able to manufacture or provide service with the stipulated cost framework. Thus, cost management has to be an ongoing continuous improvement program. Standard Costing In recent years, various tools such as activity-based costing, the balanced scorecard and target costing have been used in the business community (Kaplan Kaplan Ansari et al†¦1997). However, traditional management accounting systems continue to be widely applied (Brewer, 2000). One example of traditional management accounting is standard costing. Standards can be used with either job order or process costing system to provide important information for managerial planning, controlling, and decision making. Standard costing assists in setting budgets and evaluating managerial performance. The major motive to use standard costing is because it facilitates product costing estimation (Ask & Ax, 1997). Ask and Ax’s study is supported by a study conducted by Puxty and Lyall (1989), which reported that 76 percent of the UK commercial and industrial companies operate a standard costing system. Although it is used widely, people recently criticize it could not provide the information needed in today’s competitive environment. Despite the criticism, there are few signs that the use of standard costing tends to decrease. The survey from Ask and AX (1997) showed that 12.6 % of the companies investigated state d that they would abandon standards but on the other hand, 9.9 % stated that they would like to convert to standard costing system. The History of Standard Costing The standard costing system was developed in the early 1900s. According to Drury (1992), it was the scientific management principles recommended by F.W. Taylor and other engineers. Scientific engineers built up information about standards to set up â€Å"the best way† to use labour and material resources within manufacturing. Engineers used the standards to provide information for planning the flow of work so that the waste of materials and labour was minimized. Interestingly, engineers did not consider standards as a tool to control financial costs at that time (Drury, 1992)