Managerial Accounting - Answers to Questions

Running head: MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
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Table of Contents
Answer to Question 1:................................................................................................................2
Answer to Question 2:................................................................................................................4
Answer to Question 3:................................................................................................................6
Difference between target costing and standard costing:.......................................................7
Answer to Question 4:................................................................................................................8
Answer to Question 5:..............................................................................................................10

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Answer to Question 1:
Standard costing is considered as one of the systems of accounting that helps the
managers to quickly identify the variances between the cost and the actual cost for the
production of goods (Kaplan and Atkinson 2015). In other words, the incurred cost of the
production of the actual products is known as standard costing. The standard cost has a link
with the expected value of the product or with the budget. The method of standard costing
involves the auditors mainly consider the calculation of the cost of the manufacturing of the
direct material, direct labor and the manufacturing overhead. The calculation also involves
the fixed overhead of the budget along with the fixed and variable cost of the good.
While taking any management decision regarding the organization, standard costing
acts as one of the essential tools. While calculation, the difference (if any) can be known
between the manufacturing cost and the standard cost as predicted. So, if there is more actual
cost than the predicted standard cost, then that will be considered as unfavourable situation.
Unfavourable situation indicated to the management that different measures should be taken
to eliminate the unfavorable situation and to earn the predicted profit from the production.
Hence, standard costing is essential for the process of planning.
Similarly, when the estimated cost is less than the actual predicted cost, then that will
be a favourable outcome for the organization which shows that the management will earn
more profit than the management has predicted. Standard costing helps the managers to
indicate that when some measures are needed to be taken into the operations and when not to
earn the planned profit (Vasile and Croiteru 2013). This method is helpful for the
organization to formulate and prepare the required policies for the organization.

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The initial adaptation of this process may be quite costly, but after some time the
continual cost will be minimum as many of the extra expenses like costing work as well as
the procedures will be removed by this method. When the standard is set for every section, it
becomes quite easy for the management to execute their work according to the planned
structure and to achieve the standard. Long term as well as for the short term basis standard
costing is helpful for the organization in both ways because to achieve the goal the
management would work to improve the efficiency of the workers and to strategically
utilizing the cost of the materials (Singh and Kumar 2014).
Standard costing requires frequent and continuous reviewing so that there will always
control system in the management, which involves emergency actions to be taken when
needed. Standard costing consists of the calculation of the variances which ultimately clears
out the inefficiency of the administration where emergency action is required. This method
helps in doing the planning process as well as budgeting for the organization. Standard
costing helps to get the estimation of the changes in the cost-price-volume relationship. With
the help of this method, the managers can know about the valuation of the inventory as well
as the work-in-process goods, finished and semi-finished products. Standard for all the
products and for its components, which helps to increase the efficiency level of the
organization and to earn maximum profit.
Planning and utilizing the control system of the organization can be more efficient
when it is summed with the standard costing for setting a minimum limit for the output which
needs to be achieved by the organization at the specified time interval. Proper actions are also
determined, which will be taken into effect when there will be any need for the work.
Standard costing acts as an essential pillar for management (Faraji and Reiszadeh 2013).

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Answer to Question 2:
Standard costing method is applied in almost every organization as a part of their
planning process and also for the control system. In Orica Limited, which is situated in
Australia, they use the standard costing method for their efficiency of the workers as well as
for the materials. The management of the company uses this method as one of the crucial
vital factors to survive the ongoing and frequently changing demand of the market which
demands new strategies to be implemented in the company. Proper implementation of this
method has proved to be very beneficial and profitable for the company which is reflected in
the annual report of their company.
They have adopted many different policies which allow the company to earn profit
and also to survive in the market. The features of the standard costing are well fulfilled by
Orica Limited, which is also reflected in the increasing profitability of their company. The
managerial efficiency is also measured with the proper implementation of the policies along
with the appropriate standard costing method. Adequate application of this method has
enabled the company to increase the productivity of the employees, increase the productivity
and to minimize the cost of the production (Pishdad-Bozorgi, Moghaddam and Karasulu
2013, April).
Even after the implementation of such strong concept in the company, the managers
have report few of the issues and challenges which they have to deal every time they are
planning and doing control system to work with standard costing. There are issues related to
specifically identifying the customer needs, and there is some increase in the price level
generally, which gets reflected in the rise of the price in the application of this method.
Increase in the cost is a challenge for the managers which yet an unavoidable but still needs
check time to time to control the increment (Melo, Granja and Ballard 2013, July). The

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managers of the company are very rigid about their policies and they do not want to change
their opinion or policies according to the market need or to decrease the enhanced cost. The
improved techniques and the inefficiency of the management to eliminate the average loss
can be a part of their inadequacy to maintain the control system and planning the future
strategies accordingly.
After analyzing the article regarding the performance of standard costing in Orica
Limited, it has been found that the profitability of the company has been increased after they
thoroughly examined their previous performances and implemented the new technologies of
the standard costing. Some more techniques were also analyzed which are related to the
reduction of the cost, maintaining the average loss of the company and the gross profit from
the production. Different studies have been conducted on this topic by using various
statistical tools, and it has been proved that the company has succeeded in enhancing the cost
reduction into the company (Baharudin & Jusoh 2019). Different policies have also been
introduced into the company which ultimately has helped the company to increase its
profitability in the market and also increase the market share. The managers have efficiently
utilized the standard costing method to plan for their organization's betterment and to make
strategies which can be quickly followed by the employees. The control system of the
company has been made very rigid so that the planned goals can be met and the standard is
fulfilled through the production. Orica Limited has been a perfect example for the other
Australian companies of how to smartly implement the standard costing method into the
company framework and then enhance the profit strategically by utilizing the control system
framework. Positive and consistent behaviour and trust over the technique of the company
has been reflected in their annual report with a noticeable positive number.

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Answer to Question 3:
This type of costing method involves the initial planning regarding the project cost,
the price points and also the margins or standards it has to meet within a specified period.
Managers use different managerial tools and techniques to evaluate and plan a proper target
coting for the organization. With the help of this method, the managers of the specific
company can assess quickly the on-going performance started from the beginning of the
project. Target costing includes the result of the performance of the product life-cycle with
the usage of useful managerial tools.
Among all the industries, it has been noted that manufacturing industries mostly lie
upon this method as it is the essential tools for the managers of that industry. The managers
of the manufacturing industries use this method to evaluate their consistency of the profit.
Other industries like construction, health care, energy and FMCG works under a very tough
competition in the market, which ultimately increases the product price of the industry and
also increases the competition as well (Groot and Selto 2013). The prices of those industries
are determined by the demand and supply forces in the market. These are the reasons why
the mangers of every industry try to maintain or control the operating cost of their service and
product in the market.
The managers of the company use the method target costing to evaluate the cost of the
product and to bring in the required cost planning with the help of management of cost. The
market forces do the calculation of the price of the product at the stage of design and
development of the product cycle. The estimated cost is included with the selling price of the
product. To achieve the targeted value, every company has developed a separate team in
different departments.

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Difference between target costing and standard costing:
Standard costing is a costing where the already determined by the managers after
analyzing the market cost of the material, overhead and labour over some time. Target
costing, on the other hand, is a prepared cost which is planned at the initial stage of the
product without considering the working condition. Hence under target costing, the company
is supposed to keep on changing the planned process until and unless that suits the present
situation of the market (Sharaf-Addin, Omar and Sulaiman 2014).
The main focus of the standard costing is to analyze the inside cost, and the profits
and prices are not included in the planning. However, the target costing of any company
starts with the calculation of selling price and then the target cost is calculated by deducting
the required profit of the project (Briciu and Căpuşneanu 2013).
Standard costing is analyzed for the already existing product, and target costing is
analyzed for the planned outcome, which helps the company to design a specific process to
achieve the targeted cost. Target cost is the new and highly popular costing method for the
control the value which is developed by the Japanese, whereas the standard costing is not
such an old method of costing used by the companies worldwide (Klychova, Faskhutdinova
and Sadrieva 2014).
Target costing and standard costing both are used by the companies when required,
and both the costing methods are beneficial in their way. Few stages need the application of
standard costing method, and other steps need the use of target costing method. Both the
methods are sometimes applied in the single project at different stages. The advantages of
these two costing methods are equally important in the market to survive the cut-throat
competition.

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Answer to Question 4:
Target costing is an essential part of management. However, it also indirectly affects
the organizational activities of the company so that the costing method can help a specific
company to survive the competitive market. It is a well-known fact that this kind of costing
method requires a considerable amount of effort and professionalism along with some special
large-scale software installation which also involves a significant amount of investment. In a
situation when the market is consist of more buyers and fewer sellers like in monopoly, then
the sellers are allowed to introduce their product prices in the market as the demand is huge
and supply is less. The sellers can make more profit by applying the cost-plus approach for
setting the price of the product. As there are many competitors available in the market
globally, so the sellers nowadays are not using the old method of cost-based pricing (Valeriy
2015).
When the situation of the market is different, that is the sellers are more in
comparison to the buyers, and then the supply will also be more than the demand. Then the
price will be set by the market forces of the demand for that particular product. Here the
sellers should always stay attentive to the increasing competition in the market. The sellers
should always plan alternative options of product manufacturing and services in case of any
emergency need. The sellers here should focus on decreasing the prices of the product and
increasing the quality of the product to survive in the competitive market. Target costing
method is very beneficial for the sellers here, it allows the sellers to focus on the daily
increased market needs, and improving the quality and eliminating the price hinder for the
customers, removing competition and respecting the demands of the customers as well (Melo
et al. 2014 June).
Nowadays, target costing has become a compelling strategic plan for companies.
Many well-known companies of Australia have applied this costing method. Orica Limited is

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one of them who have successfully adopted and implemented the usage of target costing
method into their management. The managers of many companies globally have accepted this
costing method as one of the best processes as it is beneficial for any business, from small to
large, and any competitive market (Labro 2019). Every seller and every buyer gets to benefit
from the adoption of this costing method into the management system.
However, apart from all the advantages of this method, there are many issues which
were raised by many managers from different companies. They are not satisfied with the
competitive advantage that is provided by this method.
The main focus of this costing method has always been to satisfy every customer of
every business without even compromising the profit of the company. This costing method
helps all the sellers to sustain their business strategies into this daily diversifying market.
Without the help of this method, it would be next to impossible to know about the customer’s
interest in specific product or service (Raiborn, Butler and Zelazny 2013). This analyzing
process may also include personal interaction with the customers to get their feedback which
also helps the sellers to get an idea of what kind of new product or services the customers
would like to get introduced. Hence, this method helps the sellers to plan for new product and
service which they could offer to their customers and introduce that to the market which will
also help the seller to get first-mover advantage and gain more profit. Interacting personally
with the customers also retains their trust on the business and also improves the relation with
them for a long-term basis.

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Answer to Question 5:
Target costing has been a prevalent method for the company managers to plan their
strategies according to the market to earn maximum profit. This method is beneficial as it
allows the company to efficiently use the cost control method and also to manage the
earnings throughout the time (Pazarceviren and Celayir 2013). This method helps the
companies to decide whether to enter into a particular market or not, when to begin and how
are the competitors of that market are strategically planning to improve their product. This
method is applied at the initial stage of any project to get the most benefits and continuous
usage of this method will be very beneficial for the entire product life (Patil & Kshatriya
2016). Value chain concept is also involved in this costing method. When any product is
manufactured then the selling price is decided after the addition of the target cost and the
required profit (Baral 2016). This is the process of how operational strategies are linked with
long-term strategic plans. The formula of the calculation is given:
Target costing = Selling price which is planned – Profit that is required
This formula shows how the target costing is calculated. Many other situations may
come where the profit will be unattainable (Kádárová et al. 2015). Then the structure of the
plan will be made in such a way that the advantage ultimately will become attainable. At the
initial stage of every project, the target cost will be settled for a short period of the budget.
Hence, all the variable and fixed cost will be reduced. Therefore target profit will be met only
under target costing method.
Standard costing, on the other hand, is used by the managers to plan for cost and
control by utilizing the scientific analysis of value and that is measured as standard rate or
price per unit of input (Farkas, Kersting and Stephens 2016). The steps which are followed
for the process of standard costing starts with establishing the cost for every output. Then the

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next step consists of distinguishing the actual cost with the expected cost. From the
calculation, the exact variance is acquired, and then corrective measures are taken. Different
kind of methods which are already included in the standard costing method also includes
scientific technique which ensures that the usage of this method is always authentic
(Wallstreet Mojo 2020).
There is also the standard material cost which is calculated by the number of the items
multiplied with the purchased price of it and there is also standard labor rate which is again
determined in terms of the premium plan, time rate and piece rate (Steyn 2017). The standard
overheads rates are classified into three types that are variable, semi-variable and fixed
overhead. The past records of the specific project determine these overheads. The standard
hour is determined by the efficiency ratio and the activity ratio. Efficiency hour is also known
as the standard hours which is identified as a percentage of the actual hours which is engaged
in the production. Activity ratio, however, is determined in terms of percentage and this
delivers the database of several standard hours which is precisely equal to work done. This
shows the percentage of budgeted standard hours. Standard costing has many benefits for
usage by the managers. This costing method is mainly used for control. After analyzing the
article regarding the standard costing method, it was found from different studies that
standard costing is highly beneficial and useful for the use of control system purpose which
will yield results after the calculations (Tsai, Lan and Huang 2019).
Both the costing systems are equally crucial for the management purpose to achieve
the goal of earning maximum profit because to maintain the profit margin in this diverse
market can be very tough so more than one scientific analysis is needed for a single project in
any business.

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Briciu, S. and Căpuşneanu, S., 2013. Pros and cons for the implementation of target costing
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