Managerial Aspect Of Standard And Target Costing

Running head: COSTING IN MANAGEMENT
COSTING IN MANAGEMENT
NAME OF THE STUDENT
NAME OF THE UNIVERSITY
AUTHOR NOTE

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Costing in Management
Abstract
This paper deals with managerial aspect of standard and target costing. It will further
elaborate the benefits of the standard costing and the target costing. Discuss the differences
they have. Two articles has been taken for the said purposes and along with that the following
questions will be entertained in the format.

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Costing in Management
Table of Contents
Abstract......................................................................................................................................1
Introduction................................................................................................................................3
Answer to the Question 1...........................................................................................................3
Standard Costing....................................................................................................................3
Answer to the Question 2...........................................................................................................5
Answer to the Question 3...........................................................................................................6
Target costing.........................................................................................................................6
Standard And Target Costing.................................................................................................7
Answer to the Question 4...........................................................................................................8
Answer to the Question 5...........................................................................................................9
Conclusion................................................................................................................................11
References................................................................................................................................12

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Costing in Management
Introduction
The study focusses on the aspect of managerial accounting. Standard costing and
target costing will be the topic to discuss with respect to the articles selected. Standard
costing is the system in accounting which identify the variances among the cost that was
supposed to be incurred and the cost that has already occurred. It helps in ascertaining the
difference in order to take necessary measures. However, target costing depend on the cost
that are predetermined and therefore it is planned before the conception of the product and
during each and every cycle of the product till it gets manufactured, therefore, it can be said
that in the target costing the profit is kept into mind while calculating the cost of the products
and it can be identified and changed accordingly in different cycles.
Answer to the Question 1
Standard Costing
When calculating the cost for the manufacturing of goods the direct labor, direct
material, and manufacturing overhead are considered, which is the budget for the fixed
overhead and they also consider the fixed and variable cost as per the methods of standard
costing(Kianian, Kurdve and Andersson 2019). Standard costing is therefore the system of
accounts that helps in identifying the variances between the cost that have incurred for the
production of certain goods and the cost that was supposed to be incurred for the production
of such goods (Tsai, Lan and Huang 2019. Basically it is a mere differentiation of the actual
cost from the cost that was predicted. However, the cost that should have incurred for the
production of the actual goods is considered to be the standard cost. Standard costing is the
predicted cost, which supposedly have a link or integration with the expected cost, or with the
budget.

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Costing in Management
When there is any variances arises, standard costing alarms the management that there
is a difference between the manufacturing cost and the standard cost, which has been
predicted. In other words, Standard costing is considered to be the one of the most important
tool in management control. Therefore, if the actual cost is more than the standard cost then
the variances are considered to be undesirable or unfavorable (Cooper,2017). Hence, the
undesirable variances makes the management aware of the fact that if no changes are made in
order to change or rectify this, then they should expect least profit than what they have
expected to receive. Similarly, if the estimated cost are lesser than the actual cost, then it
ultimately leads to make the outcome desirable. The Favorable outcome identify the element
that the management can expect more benefit and profit then expected if the things goes the
same way as planned (Tsai, Lan and Huang 2019).
After establishing the goals, setting the target and forming the budget. It is
unnecessary to repeat the fact that how much the standard costing is relevant as the
management tool in the management that helps the management to have a check over their
expenses and if required, takes necessary steps for their improvisation. Standard costing do
serve as a guide to the management in different managerial tasks as well as in times of
formulation of prices and policies (Kianian, Kurdve and Andersson 2019). Standard costing
leads to the identification of the variances and differences that allows the detection of
inefficiencies and mistakes over which further investigation can be carried on by the
management. For the purpose of planning and budgeting, it proves to be the most helpful
tool. It helps in finding the estimation of changes in the cost-price-volume relationship.
Management do get proper notification about the valuation of inventories they get all updates
regarding the work-in-progress, semi-finished and finished goods. Since the standard is fixed
for the product and its component, its process and its materials, it helps to increase the profit

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of the company by reducing the cost through the improvisation of the efficiency (Steyn
2019).
It has been noted that once the standard costing is implemented, this implementation
will lead to the savings in cost as most of the costing work and procedures will get
eliminated. There is designation of cost structure under different cost-center, which are cost
specific. Therefore it leads to the ultimate savings and identification at each level. Standard
costing has an important role in drafting the profit and loss account on the short term basis,
which helps the management to take prompt decisions. This system promotes labor efficiency
and cost-consciousness among the supervisors, employees, executives and top management,
which ultimately helps the management in the planning and controlling and ultimately lead to
the increase in efficiency and productivity as well(KocakulahMC, Stott and Manyoky 2017)
Answer to the Question 2
Effective management is regarded as being one of the key factor for the survival of
the manufacturing concerns in Nigeria. It has to be noted that the managerial efficiency can
be measured in many ways including the profitability of the company or the reported profit
for the financial year, which can be achieved only if there are proper and adequate
implementation of the policies to reduce the operating cost.
One of the ways to reduce the production cost in manufacturing concern is adequate
utilisation of the standard costing. However, along with the benefits that are rendered by the
standard costing technique, there are also different drawbacks which comes along with this
technique of cost control. There is the problem of identifying the specific needs of the
consumers. It happens due to the fact that it enables the firm to preset the target cost and
processes and the cost obliges the employees. Therefore, it enables the company to enhance
its productivity, minimise the costs and efficiency of the employees (Radović, 2017).

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However, along with the benefits that are rendered by the standard costing technique, there
are also different drawbacks which comes along with this technique of cost control. There is
the problem of identifying the specific needs of the consumers. Also, it has been noted that
there are persistently increase in the general price level, which added up to the problem of the
proper application of this standard costing technique. Managers negative attitude towards the
standards and constant changes in the policies of the government and political instability
creates issues. Along with that, changes in the technology and inadequacy of the accurate
estimation of normal loss during the production courses (Egger, Strecker and Zoller-
Rydzek,2019).
This study further illustrates the effect of standard costing on the profitability of the
selected manufacturing companies in the Edo state of Nigeria. The result of profitability has
achieved after examining the effect of the standard costing technique on the reduction of cost,
normal loss and the gross profit out of production. The study has further worked up into the
usage of standard costing on the profitability of the companies in the Edo state of Nigeria.
There have been three hypotheses that have been tested and developed. The formulated
hypotheses were tested using Z-Test statistics and at 5% Alpha level. The outcome generated
from this study has revealed that there is a significant increase in cost reduction after the
application of standard costing. It has also been observed that more the company practices the
standard costing, the more it will increase their profitability. The outcome generated from this
study has revealed that there is a significant increase in cost reduction after the application of
standard costing. It has also been observed that more the company practices the standard
costing, the more it will increase their profitability. (Viriyasitavat 2019)

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Answer to the Question 3
Target costing
Target costing can be viewed as the proactive cost management tool that is used in the
reduction of the total cost of the product. It is the method and is one of the tools in the
management accounting. This is the costing method that is applied in full lifecycle of the
product throughout the products production, engineering, design and research. In the
application of the Target costing the company initially decide and plan in advance the price
points, project cost and the margins it want to achieve. A management team can have
continuous monitoring over the product from its initial phase starting from its design to its
entire product life-cycle by using this effective tool of target costing. In the manufacturing
industries, it is considered to be the most important tool in maintaining the consistency of
profit. It helped managing the firm in reaping profit in a very competitive environment.
Therefore, selling prices gets very difficult to control by the producers and thereby, they try
to control their cost. Therefore, a management focuses on influencing every aspect of
product, service or operating cost. (Simshauser and Gilmore 2018). A management team can
have continuous monitoring over the product from its initial phase starting from its design to
its entire product life-cycle by using this effective tool of target costing. In the manufacturing
industries, it is considered to be the most important tool in maintaining the consistency of
profit. In certain industries like FMCG or health care, energy and construction, the
competition stays so intense that the prices get determined by the demand and supply of the
product. Therefore, selling prices gets very difficult to control by the producers and thereby,
they try to control their cost. Therefore, a management focuses on influencing every aspect of
product, service or operating cost. (Simshauser and Gilmore 2018)

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Standard and Target Costing
Standard costing is the predicted or predetermined costs which are based on estimates
of labor, material and overhead for the period of time and under the specific state of working
conditions. These are basically the actual condition and therefore, the standard would reflect
which is achievable in the existing working condition. Whereas, the target costing is the
desired cost, which may or may not be achieved in the current working conditions as it is the
expectation that is prepared before any production hits down and therefore, it might require
some changes during the production methods in order to achieve the desired result
(Căpușneanu 2019). Compared with the traditional standard costing it generally deals with
the administrative, marketing and distribution aspect of the management. The main objective
of target costing is to have a complete check on the cost since they have plan and calculate
the cost of the product early during the design and development stages of the product and
therefore, they are supposed to take proactive decisions of cost planning, cost reduction and
management of cost as they plan and calculate the cost of the product early during the design
and development cycle and not during the product development and production. Though the
price of the product is determined by the market forces, hence, the company are the price
taker and not the price maker. The expected and estimated price margin is already included in
the selling price of the product. The goal of the management is usually to find the differences
between the target and the current cost which is the ultimate cost reduction. Separate teams
are set up for the purpose of different integration activities of designing, purchasing,
manufacturing, marketing in order to find and achieve the target cost
However, target costing deals with having a more proactive approach and the price of
the product will be decided first and then there will be discussion over the decision of
identifying the cost of the manufacture. The focus of standard cost is inwardly focused and it
not necessarily include prices or profits while on the other hand target cost begin with selling

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Costing in Management
prices and therefore move backwards in order to calculate the target cost by deducting the
desired profit. Standard cost is usually calculated on the existing product while on the other
hand target cost can be calculated for the planned products so that the designed process can
be changed in order to achieve the target cost. Target cost is the new management method of
costing to control cost developed by Japanese while the standard costing is not so old.
Therefore, both the costing method have their own advantages and are applied to the various
time of product life-cycle ( Labro 2019).
Answer to the Question 4
In the market, where the number of sellers are limited and the demand gets exceeded
by the supply. In this situation seller can mark the prices of the product in such a way that
will lead them to achieve more profits, which means they might opt for cost plus approach to
pricing. Since many companies faced the global markets and increased competitions, thus
they opt for precluding of such historical cost-based pricing practices. Similarly, when the
supply is exceeded by the demand then the prices are driven by the market forces in a
competitive environment. Therefore, sellers are required to take notice of the presence of
strong competitions, alternative products and services as well as their prices requires
consideration. In the competitive environment, order to achieve higher market penetration,
the company needs to decrease their prices without even compromising with the quality of
the product. Additional services will provide additional advantage. One of the best benefit of
the target costing is that it put focusses on an increased understanding of markets,
competition and needs of customer in terms of products, quality and price (Khateeb,2019).
The target costing is a simple method of understanding the process; however, they
significantly affect the activity of the organisation and survival of the company in the extreme
competitive environment. However, it requires a continuous significant efforts of specialist

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Costing in Management
and professionals and might also require the installation of large-scale software (Marhoon,
Salim and Kadhim 2019).
Target costing is one of the most important strategic weapon, which has been applied
by the number of leading companies around the globe. Managers are mostly attracted by the
competitive advantages that the target costing has provided to many auto mobile companies
of japan. Contradictorily as japan has exported their technique to South Korea, the
companies like Samsung, Hyundai have started gaining competitive advantage over their
Japanese counterparts. In spite of the proven success of the target costing, many managers
still under estimate the competitive advantage of this tool (Wu, 2019). Target costing
focusses on the satisfaction of the customer and attaining competitive edge. Therefore, target
costing focusses on the specific requirements of the customers and the prices they are
prepared to pay. The process might include discussion with the customers and to get an idea
whether the customer are willing to pay for the design (Alwisy, Bouferguen and Al-Hussein
2018).
. Since many companies faced the global markets and increased competitions, thus they
opt for precluding of such historical cost-based pricing practices. Similarly, when the supply
is exceeded by the demand then the prices are driven by the market forces in a competitive
environment. Therefore, sellers are required to take notice of the presence of strong
competitions, alternative products and services as well as their prices requires consideration.
In the competitive environment, order to achieve higher market penetration, the company
needs to decrease their prices without even compromising with the quality of the product.
Answer to the Question 5
Target costing are usually applied at the earliest stages of the development of the
product and continue its application throughout the entire product life cycle. Target costing

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also involves the value chain in the entire application of the process (Zaharova, Sandrykina
and Ivanova 2019). When the product gets developed and there comes the need to decide the
prices of the product then the product selling price is determined after adding the cost that is
targeted and the required profit and this is how it linked the operational strategies gets linked
with the long-term strategic plans. Therefore the formula lies in this way:-
Target costing = Selling price which is planned – Profit that is required
From the above formulae, the target costing can be derived. However if the scene gets
created that the required profit becomes unattainable then the product will be designed in
such a way that the required profit gets attained (Hint and Şandru, 2017).
Target costing has been developed in Japan. The main aim of this method is to
provide proper planning of profit. This device is usually utilized to control the cost and to
manage the profits continuously over the entire product lifecycle. Therefore it can be rightly
said that it is the part of the strategically management system and it helped in entering the
market and help in taking decision entering the market taking consideration of the market
prices of the competitors (Hummel, 2019). The use of value engineering and the value
analysis can be utilized in order to specify or to bring in more innovative ideas, in order to
generate more innovative products and cost effective products and features. This will further
help in reduction of the target cost and thereby increase of the profit. Initially target cost will
be set for the short period of budget and therefore, all the variable and fixed cost are expected
to reduce on the regular basis and therefore target profit is the kind of commitment which is
agreed by all and involve everyone who be a part of it. Therefore for the purpose of planning
target costing is recommended.
. The process of standard costing goes in the following ways. It first of all establish
the cost for the individual output, then there is measurement of the cost for that output. Then

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the comparison with the actual cost from the expected cost is measured. Then the variances
are located and corrective actions are taken for this regard and finally the analysis of the
variances happens in order to draw the reason and the conclusion from it (Okpala, 2016).
There are different methods that are involved in the standard costing setup and each
methods has its own control and therefore everything is as per scientific technique and
therefore there are no mishandling. There are standard material cost which are determined by
the number of items multiplying by the purchase price of it. Standard costing is the technique
to do the planning of cost and control, keeping in mind the technique of the scientific analysis
of the elements of the cost and it is measured in terms of standard rate or the price per unit of
the input and also the standard output. Then the standard labor rates are determined in terms
of the time rate, piece rate and the premium plan. Standard overheads are further classified in
terms of manufacturing, selling, administration and the distribution overhead, which gets
further classifies into variables, semi-variable, fixed in order to draw the proper estimates for
the specific classes within a budget period. However, standard overhead rates are determined
by the records from the past. However the activity ratio is the ratio which is also expressed in
terms of percentage and it provides the data base of the number of the standard hours which
is equal to the work produced and show the percentage of the budgeted standard hours
(Alexandra, 2017). There is a determination of the standard hour and thus it helps in
determining the efficiency ratio and the activity ratio, where the efficiency hour is the number
of standard hours that is expressed in terms of percentage of the actual hours that are spent in
the production of that work. Therefore, for the purpose of control as per the study it is highly
suggested that standard costing can be effectively use for the control purposes, thereby
yielding results.

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Conclusion
At the end of the study it has been noted that both the managerial accounting tool is
useful in the management of the company. The main motive of the company has always been
to reduce the cost in order to increase the profit. Therefore, it has been understood how much
importance does both the standard costing and target costing had on the detection and
prevention of any unplanned expenses and to have a check over everything which is going
on. Ultimately, which contribute to the accumulation of the profit of the company plus
managerial excellence.

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