Cost Analysis Techniques | Managerial Accounting

Running head: MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Name of the Student
Name of the University
Authors note

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Executive summary
The objective of the report is to analyze the need of the standard costing and target costing in
the modern business environment. The report contains a brief detail of the concept of
standard costing and target costing. in addition to that the report also consider two journal
articles in which the application of standard costing and target costing in two big
organizations is described in details. The report concludes with the explanation of the use of
the standard costing and target costing techniques either in cost control or in profit planning.

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Table of Contents
Introduction....................................................................................................................3
Discussion......................................................................................................................3
Answer 1........................................................................................................................3
Answer 2........................................................................................................................5
Answer 3........................................................................................................................8
Answer 4......................................................................................................................10
Answer 5......................................................................................................................14
Reflective journal.........................................................................................................14
Conclusion....................................................................................................................17
References and bibliography........................................................................................18

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Introduction
Standard costing and target costing are two cost analysis techniques that are used by
the managers to bring control in the cost of production and to develop a efficient planning
method in order to enhance the profitability of the company. In the modern days these two
costing methods are largely applied by the management for the purpose of decision making.
Though there are several differences in the basic concept of standard costing and target
costing but both these methods are useful for taking effective decisions that can bring control
in the cost of production and increase the efficiency of the management.
Discussion
Answer 1
The features of standard costing as a planning costing and control system are
discussed below –
 Better cost control – Firms can achieve better cost control by setting standards for all
the costs incurred and afterward can focus on inconsistencies and differences to know
where things did not move as per the plans of the management. Standard costing
techniques assist the manager to ascertain their performance in controlling the
expenditures for which they are held responsible. Additionally, analyzing should be
done to assess whether or not the inconsistencies and differences were arisen by the
less use of materials, market condition, malfunctioning of the machines, or due to
inflation. Standard costs focus on the possible strength and threat for the organization
and acts as a warning to them (Callus 2019).

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 Benefits for organizational planning and decision-making - When the organization
sets relevant standard costs and are able to control the production cost then the future
actual cost must be develop keeping in mind these standard cost. As a result, more
relevant budget and estimate cost can be prepared by using the standard cost that will
be beneficial for the management of the organization for decision-making purposes
(Potkányet al 2017).
 Appropriate and simple stock measurement –A standard cost is not that complex stock
valuation compared to the actual cost. Under an actual cost, unit costs for quantity of
similar product may vary. For instance, such variation may occur due to malfunction
of the machine during the production of a givenquantity that can increase the cost for
the labour and overheads of that batch. However, under the standard cost, such
unnecessary costs are included in the stock. These surplus costs are charged under
variances account after comparing it to the actual cost. Thus,all units of a given
products produced at a particular period can be assumed to be same (Hint and Şandru
2017).
 Economy in maintaining the records –Standard cost requires maintaining more
information during the accounting period however, the cost of maintaining the
standard cost is lower compared to that of the actual cost.
 Possibility of reducing the production cost –The standard cost system is cost savings
method. The member of staff becomes more conscious and more serious of
completing their work if standard costing is used. The companies can control costs
only when the employees become alert in reducing the costs.
 Useful in budgeting –Standard costing is used for preparing the budget. Various
budgets, which are prepared based onstandard costing, are useful for the organisation.

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 Useful in formulating policies –This method is of high worth to the organisation in
governing the cost and preparing policies for production. The cost of producing new
products can be estimated with the help of standard costing.
 Helping in differentiating activities - With the help of standard costing, skilled and
unskilled activities can be evaluated. Hence, the skilled labour can get the paysnotice
to improving the activities of the unskilled labours.
 Reduces wastages- With the help of the standard costing the certain wastage can be
eliminated such as malfunctioning of machines, wastage of materials etc.
Answer 2
Use of standard costing in south east Toyota Pvt ltd
In the motor industry cost control is very essential as the process of production is very
expensive and complicated. In order to bring more control on the outflow of cash it is
essential to impose standard costing which will help to mitigate the loss that the company
may have to face due to lack of control on the cost of production.The standard costing will
help in reducing the costs of the manufacturing of the cars. In order to understand the
effective usage of the standard costing several questions have been asked to the management
of the company and they replied that the use of the standard costing has bring more control in
their costing system and reduced the cost of the products (Reitmaier and Schultze 2017).

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Standard costing facilitates the reduction of costs on the basis of the framework of
maintaining costs as per the estimated budget of the company. The standard costing method
improve the efficiency of the management to frame a cost structure that will increase the
efficiency of the production process at a lower cost. By using the standard costing the
management will be able to predict the variances in the costs more effectively at the end of
any financial period (Caruana et al 2018).
The management of the south east Toyota by applying the standardcosting has been
able to keep a balance in the cost of their products. The application ofthe standard costing is
largely dependent ion the approach of the management and how the management want to
implement the standard costing system in the production process. For a huge automobile
company like Toyota an effective effort should be given to set the right standard for the cost
of labour, the valuation of the spare parts of the motor and the overhead costs. An inability to
set the proper and accurate standard costing system will not help the management to get the
correct result for the organisation (RautiainenSippola and Mättö 2017).
In the case of the south east Toyota the company has been able to set the correct
process of standard costing which will enable the management to reduce the cost of labour
and to manage the waste of spare parts of the motors. The company is also able to reduce the
overhead cost after it successfully implement standard costing in their method of cost
analysis (AhmetiSahiti and Ahmeti 2016).
Sunline auto insurance case on the application of target costing
The business manager, Janet pretty, of the sunline auto insurance in the last quarter of
the financial year observed that although the sales margin is growing but with that the loss
percentage is also increasing over the period. This trend is very devastating for the company
as the management does not have any idea about what wrong is going on with the company.

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Even though the demand for the auto insurance is high in the united states but the company is
failing to improve its profit percentage (Wakefield and Thambar 2019).
The business manager though recently joined the company is very concerned about
solving the situation and analysing the situation the manager realised that the company
requires a target costing system to overcome this situation. The manager is of the opinion that
if a company wants to make improvements in its products and try to capture more market it is
essential to employ the target costing approach.
In this case the insurance company though have enough demand in the market but due
to the lack of less features in their insurance products they fail to attract the customers. Target
costing can help the management to frame a plan following which it can be possible for the
company to increase its profitability (Siponen and Baskerville 2018).
By using this method, the company can determine the target cost by deducting the
profit from the estimated selling price. Moreover, the target cost is considered as the
maximum allowable cost that the company will accept for a new product. Thus, it is essential
for sunline auto insurance it is essential to apply the target costing method as it will give an
idea to the management what target cast it should charge for a new product so that it can
provide the maximum profit percentage (Lapsley and Rekers 2017).
The target costing can be served as the tool for managing the cost and to set a plan for
profit maximisation as it guides the company to identify the areas where cost control is
required and to determine the target cost at the time of designing the new product. Moreover,
the target costing is a customer-orientedtool as by applying the technique it will be possible
for the company to consider the perceived value that the customer wants to give to the
product, at the time of fixing the target price and fulfilling the requirement as per the

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customer’s choice. The target costing also helps to reduce the cost that does not add value to
the product (Tabitha and Oluyinka 2016).
As all these features of target costing will be essential to reduce the current problem
of the sunline auto insurance it will be appropriate for the manager to select target costing
technique to resolve the issue of lower profitability and gain a competitive advantage in the
market.
Answer 3
The process of governing the real cost estimate of any goods or services after
retaining the required profits margin behind the products or services are known as target
costing. It is not a part of any costing methods. However, it is highly essential for the
organization to survive in the growing competitive business (Daryakinet al 2017).
The main characteristics of the target costing are as below –
 It is used for the purpose of cost reduction and costmanagement and it is a part of
the management process.
 The force of demand and supply determines the cost of the product.
 The views of the customers, the condition of market and profitability are given
much importancein target costing.
 The target costing for the purpose of product designing and introduction of new
products has been considered as an integral part.
 The target costing puts emphasis on the least profit margin, which has been earned
from each product of any cost.
 The divergence between present cost and targeting cost is the degree of cost
reduction.

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 While fixing the targeting selling price various things are taken into consideration
such as designs of the product, specification of the products, requirement and
demand of the customers.
 The desired profit margin is added in the target-selling price.
Similarities between targeting cost and standard cost.
Though standard costing and target costing are two different forms of costing
techniques, they do possess some similarities. Here, has a glance at the similarities between
standard and target costing:
 Both standard and target costing is a form of cost accounting methods, which aims
at developing effectives strategies for cost management of a company or business.
 Both the forms of costing technique came into existence to overcome the
limitations of the traditional costing system.
 Both techniques are used to governance and reduced the price of the goods and
services.
 Both forms of methods are useful in directing the cost in the long term.
 These techniques are useful in formulating the future cost of the products and
services.
 The main motive of the both techniques is to assist the business in the growing
competitive market.
 Both target costing and standard costing are used in the assembling and
production industries.
Difference between standard cost and target costing
Following are some of the difference between standard costing and target costing –

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 The objectives of the standard costing are to formulate the value of the product in
future whereas the main goals of the targeting cost are to sustain in the growing
competitive market.
 The standard costingfocuses on the goods and services, which are already been,
produced whereas the target costing focuses on the products and services that are
going to be produced in the future.
 Standard cost is not useful in eliminating the cost during the advancement process
because of contradictory nature and financial accounting. On the other hand, in
target costing, the maximum allowable cost for a particular product or services
can be ascertain which in turn lowers the product cost while it is being
manufactured.
 Standard costing is focussed internally; hence, it does not take profits and prices
into consideration. However, target costing estimates the cost by deducting the
target profit margin from the attainable selling price as decided by the firm or
organisation. Target costing works backwardly.
 Standard costing is a traditional form of cost accounting method. Whereas target
costing is the latest and advanced type of costing techniques which is formulated
by the Japanese.
Answer 4
Target costing is a technique where cost of the goods and services are fixed keeping
in mind the condition of the market and various other factors such as similarity of the
product, the nature of the competitive market, no or low switching cost for the consumers.
Management has to control the costs keeping all these factors into considerations. Target cost
is calculated by deducting profit margin from selling price of the product (Steyn 2017).

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The competition in some industries such as construction, healthcare, energy, are so
extreme that the force of demand and supply in the market determines the price of the
products and services. Producers have no or low control over the selling price of the goods
andservices.
The crucial aim of the target costing is to help the producers to use various techniques
such as dynamic planning, managing and reducing the cost to control and calculate the cost
during the initial stage.
Target costing is relevant in today’s competitive world-
The majority of the benefits that a specific item is relied upon to create is well
considered during the item arranging period of an item the executives, that is, before it is
conveyed or advertised. This supposition that is likewise present in the capital planning
and it has to do with the way that during the advancement stage, the executives should
remember the highlights or properties that
 Give them an edge over contending contributions
 Influence the costs that will shape overall revenues. As per (Domanović and Janjić
2018) likewise consider them configuration to be a vital driver of income, though
client bid, yet in addition through mechanical execution and cautious planning for its
presentation into the market. Item configuration additionally influence costs “as a
general guideline, 80% of the expenses are built-in during item advancement.
 The operation of the company can be improved in the long-run creating economies of
scale.
 Cost reduction and cost management is the focus of the management.

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With increased competition and huge industry depth, the insurance industry is in dire
need of implementation of target costing. Some of the examples to implement target costing
are as follow:
1) Outsourcing of back-office operation:
Data maintain by the back office is highly important and thus back office operation
constitute a major costs for insurance companies. Information technology and operations
often constitute around 40% of the costs of the company. If the total cost is $100, these
segments will contribute $35 to $45. Sun line auto insurance can streamline such costs by
outsourcing the operations to Asian countries like China, Vietnam, and USA wherein the
personal costs, as well as service costs, will be comparatively lower. This can result in the
reduction of cost to the tune of 50% and reducing such operational costs to $20 to $25 instead
of the regular $30 to $40. This will result in an increase in profit and the company might even
be able to pursue an aggressive pricing method to capture more of the market share.
If the existing selling price of the policy is $110 and existing cost was $100 by
implementing target costing in back office operations, the company can reduce the cost to
$80 to $90 thereby increasing their profit by 7%to 15%.
2) Reinsurance costs:
Insurance companies often employ reinsurance with other insurance companies to
manage and mitigate risks. Contracts are signed with various insurance companies from the
region and outside to share costs and profit in case of claims. Sun line auto insurance would
have to pay a certain sum of their premiums to the reinsurer for these services. Sun line auto
insurance can reduce such costs by signing a long-term contract with other insurance
companies ensuring long-term association that would give them certain price benefits. If sun
line auto insurance currently paying for reinsurance then a long-term contract can reduce it $2

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to $3 which will give them a price advantage of 40% in terms of reinsurance, costs that are
being borne by them.
Thus, target costing can reduce help the company to increase its profits by
streamlining and eliminating the costs that are high and increasing operating margins without
an increase in costs.
Answer 5
Based on the literature finding it can be said that standard costing is a better tool for
controlling the cost of the products and to reduce the increasing trend of the cost of
production. On the contrary the target costing can be better used for planning purpose. As the
target costing helps the organization to make plans regarding fixing of the cost and how to
increase the profitability it can be said that the target costing is best applicable for planning
purpose (Ahmad, K., 2017).
Reflective journal
I have studied these two journals and from that I gained an in-depth knowledge about
the concept of standard cost and target costing. the journals give a brief detail about the
practical and theoretical application of the two methods of costing. from this journal it can be
possible to understand how the application of the standard costing can help the organisations
to reduce the cost of production. From this article I have learned that the standard costing can
be applied by following different methods. The standard costing effects directly in the labour
cost and also in calculation of the overhead. I have found that the management of the south
east Toyota Pvt ltd has efficiently implement the standard costing in the production process.
From the journal I have detected that the performance of the company has improved after the

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management has implemented the standard costing technique in the costing process. The
budget of the company is also made more effectively by using the standard costing method.
From the second journal I get an idea about the effectiveness of the target costing. in
this case the sunline auto insurance company failed to increase its profit margin even though
the company is able to enhance its sales volume. From this case study I have gained the
knowledge about the concept of target costing and from the case study I have analysed that in
case of setting the price of any product with the objective to achieve a desired profit margin.
From this case I have observed how the management of the company successfully implement
the target costing technique and solved their problem of reducing profit margin.
From the journal I did not understand the application process of the standard and
target costing techniques by the management. In case of south east Toyota pvt ltd the
management does not specify how they implemented the efficient standard costing technique,
they have only mentioned that the application of the standard costing help them to get better
results. The process of budgeting is not mentioned in the journal.
In case of the second journal also it is difficult to ascertain how the company applied
the target costing technique in the organisation. the process of calculation of the target cost is
not shown separately in the journal so it become difficult to ascertain the actual figures of the
target cost.
To solve this difficulty, I have studied some more books and journals from where I
have learned the process of calculation of the standard costing and the target costing. I have
learned some formulas which made my concept clearer.
From the research I have learned how to solve complex situation of costing and get a
better understanding of the practical application of standard and target costing in an
organisation. the research has given me the scope to make an elaborative study of the various

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concept of costing and how to solve the issues that are related with the productivity of any
organisation. I have enjoyed the learning process from which I have acquired knowledge
about various formulas of standard and target costing. The research gives me the scope to
acquire in depth knowledge about the theoretical aspect of the costing techniques that are
used by big companies for decision making system.
Apart from knowing concept of the various costing method I have also learned about
the approach that the management of the two companies shown at the time of difficulties.
This research contains a detail of every aspect of the costing techniques that are applicable
for a company to achieve its desired objective.
The difficulty that I have faced in the research is collecting of data as there are various
sources and I have to select the best reliable data that can make the research work more
accurate and credible.
I have gained the basic knowledge about the costing methods that are used by the
companies to bring control in their cost of production by using the standard costing methods,
and from the target costing techniques I have gained the knowledge about planning methods
used buy the organisations.
I have to search many journals and have to collect reliable data about the companies
which I found challenging. The collection of data from various sources and to select the
correct article within the schedule time, is a difficult issue that I have to face during the
research.
From the assignment I have learned how to make practical application of the costing
system in the organisations and how these systems can be used to solve the problem of
increasing cost of production and how to make plan in order to achieve desired profit.

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In the modern days with the increase in cost of all the variable inputs that are required
for the manufacture of any product the need of standard d and target costing can be realised
by all the organisations in the world. Both the methods of costing help the management of the
organisations to bring more control in the production process and make a effective budget so
that the organisation can make optimum utilisation of the resources available to them. The
standard costing helps to fix the cost of production and the target costing is used to make
planning in order to increase the profit margin. There are some differences in these two
methods but the final objective of both these techniques is to assist the management in taking
decisions that will improve the productivity as well as profitability of the organisation.
I have leaned from the research work that in the modern days in order to help the
organisations to achieve their objective it is essential to have a in-depth knowledge about the
standard costing and target costing methods. Both the techniques of standard costing and
target costing is indispensable to set the plan based on which the company will carry on its
operations and will try to capture the market. The standard costing will be used by the
management to impose control over the production cost and the target costing will assist to
set the target cost which the company will charge to the customers to achieve its desired
profit margin.
Conclusion
From the above discussion it can be concluded hat in the modern days it is essential
for all the companies to implement the standard costing and target costing technique to
achieve their desired objective. From the analysis of the two journals it can be realized that at
the time of financial crisis the companies can adopt standard costing in order to control the
cost of production and to prepare a budget that can help the management to make optimum
utilization of the available resources. On the other hand, the target costing can be used to

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make a plan on the basis of which a cost is fixed to achieve predetermined profit margin.
With the increase in complexity in decision making process in the current business world the
use of standard costing and target costing will become more relevant in the future for the
organizations.

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