Importance of Standard Costing in Management: Advantages and Disadvantages

This article discusses the importance of standard costing in management, its advantages and disadvantages. It highlights the drawbacks of not updating information and how to improve the cost accounting system. Two articles are discussed that highlight the importance of standard costing and the different aspects related to it.

Managerial
Accounting
Assignment

1
By student name
Professor
University
Date: 30th Sep 2018.
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Executive Summary
In the given assignment two articles have been selected that highlights the importance of
standards costing and the different aspects that are related to it and highlights the differences
between the two articles, the overall purpose of the research articles are also stated along with
the learning outcomes. Standard costing is a type of process which companies can follow and
that can help them in understanding what is the overall loophole in their management
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................3
Advantages of Standard Costing..................................................................................................................5
Disadvantages associated with Standard Costing........................................................................................6
Discussion of the two journals.....................................................................................................................7
Explanation of the Journals.........................................................................................................................8
Purpose of the Studies and Research Question...........................................................................................8
Similarities between the two articles........................................................................................................10
Dissimilarities between the two articles-...................................................................................................10
Specific Outcomes of the two articles.......................................................................................................11
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13
Introduction
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There is various type of costing methods that the companies can apply for their
operations. Out of these various methods one of such method is standard costing. It works based
on comparison between the actual and the standard and shows where the company is lacking
when both are compared. The variance between the given costs are taken as a point of analysis
for the management of the company and based on that they take important decisions. It helps
manufacturers in understanding the variances between the actual good cost and the expected cost
of the goods produced (Axelsen, Green, & Ridley, 2017). It helps in showing the deviation from
the expected standards that are set by the organizations. There are lot of research that goes in
this, it aims to establish a relationship where company take charge of the expected results which
they figure out based on a lot of research and assumptions. Post that they analyze the market and
find the conditions that can influence their expected cost settings and based on all this they
calculate the expected cost. Post that they compare the actual cost with the standard cost and the
difference between the two are termed as variance. Now variance can be both favorable and
unfavorable. Favorable variance is when the actual cost is less than the standard cost this implies
the fact that the company was able enough to save their cost with their efforts and hence they are
working in the correct direction (Epstein, 2018). Unfavorable variance is often the point of
discussion in many companies, as they reflect the inefficiency of the management in matching up
to the set standards, it affects the overall financial position of the company. It shows that the
company has failed in more than many ways to deliver what it was expected of. When the actual
costs are more than the expected cost, it shows that the company is not putting their efforts in the
right directions. Hence when this happens, the costs are analyzed and based on that the decisions
are taken by the company and they try to find out the reason why their expected costs where less
than the actual cost and hence they try their best that in future similar things does not happen,
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where they must lose on their revenue (Delone & Mclean, 2004). The main aim of standard
costing is to help the management in various decision-making process, management of resources,
taking necessary steps as and when required and fueling all the operations of the company. It
helps them in understanding that various aspects like prices fixation, decisions with relation to
the buy-make the product, take analysis about the benefits that needs to be given to the
organization. It has been adopted by many companies given that the benefits which organizations
draw them is huge (Giacomo, Kamalesh, & Giovanna, 2013). The two articles have been taken
into consideration for the different aspects of the standard costing and the various advantage and
disadvantages of the standard costing is stated below:
Advantages of Standard Costing
 It helps the organizations in adopting better budgetary methods that can help them in
reducing the overall cost and improve the overall profit for the companies around the
globe.
 It helps the management in ascertaining that proper controls are in place. Controls helps
in checking whether there has been a difference between the actual and expected and thus
controls can help in increasing the efficiency of the management in attaining the desired
outcomes. Hence it helps in establishing better controls on part of the management.
 Standard costing method helps the management in understanding the level of inefficiency
that might be there on part of the company. Inefficiency occurs when the company does
not attain the desired outcomes and thus when unfavourable variances occurs the
companies can look for different reasons that have caused this so that in future they are
able to attain the desired outcomes which they want.
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 It also helps in establishing responsibility and authority as it helps the management in
understanding whether the employees are working to the best of their abilities and are
giving the desired outcomes that are needed. Thus, it helps in performance evaluation and
management can ascertain how each department is contributing to the growth of the
organization and what are the areas that they lack in and need some improvement so that
in future the same problem will not continue for the company.
Disadvantages associated with Standard Costing
 The main concept of variance analysis is something that would help in allocation of
the mistakes on part of the companies. But that is not effective because employees
can only be held responsible for that activities which are controlled by them. It is
important that concepts should be segregated into controllable and non-controllable
actions and thus that would require a lot of efforts on part of the management and that
is a complex portion. Hence, we see that proper allocation of the mistake require a
more qualitative analysis (Covaleski, Evans, Luft, & Shields, 2003).
 There are a lot of assumption based on which these expected forecasts are dependent
on. Few of these includes the past performance of the company, the maximum
theoretical efficiency and helps in obtaining a good yield for the company. In case the
management is not able to analyse these forecasts properly and the overall standard is
very high for the company, then that would be highly demotivating for the employees
of the company and unrealistic goals often leads to huge losses, as it hampers the
efficiency of the members of the company. Hence, we see that assumptions should be
set at achievable levels for the company.
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 It is also very evident that changes are happening very now and then. Change is the
only constant for the organisations and it is important that companies should analyse
and update their standards on timely basis so that it is updated and helps them to work
as per the recent trends and does not make the overall result redundant and not viable
for the companies (Eddy, Filip,R, & Warlop, 2004). The overall requirement to
update these changes on a timely basis is not good for the company as it leads to
added cost, and the management is not always prepared to take such steps.
 It is one of the most expensive technique as companies needs to have great amount of
technical skills for adoption of this technique and apply the same for their companies.
Regular updating is important and companies might fail in it if they are not able to do
that but that is also very expensive. Hence, we see that small and medium sized
organizations are not able to apply these kinds of principles for their companies and
hence it is only restricted for large departments but what we also see is that in large
companies also it does not fit for all the departments (Charles H, Giovanna, Dennis
M, & Robin W, 2015).
Discussion of the two journals.
The two journal articles which have been considered here for discussion on the given
topic are “Standard Costing Games that Managers Play” by Cavatina, Richard V and Calvasina,
Eugene J and “How to Tell If Standard Costs are Really Standard” by Barnes, John L.
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Explanation of the Journals.
The first journal article highlights the importance of proper information that needs to be
given to the managers for the preparation of their standard costing. It highlights the demerits that
are associated with standard costing and in case companies fail then the main sufferer are them
only. Thus the importance of proper information is highlighted in this article (Schoenberger,
2016). The second article deals with the need and importance of standard costing techniques and
their evaluation in case of a textile industry. It highlights the methods that have become obsolete
and how companies can change them and make them better (Johan, 2018).
Purpose of the Studies and Research Question
In case of the first study the authors highlight the various drawbacks in case of standard
costing as it is dependent on the information that the managers are drawing. As per the author
there are three methods for allocation of the basic function of standard costing- the first method
includes determination of the expected values, second includes collecting the actual values and
the third method includes evaluating the performance of the company by comparing the actual
with the expected (Calvasina & Calvasina, 2017). The author has discussed the various standard
costing technique with help of several games, like “Everlasting Standard Game”. This talks
about companies in which the manager believe that implementation of standard costing is a
onetime process and does not include updating them on timely basis and thus that leads the
information to be redundant. The second game is the “Unbreakable Schedule Game”, as per
which the standard costs are revised but only on the scheduled time set for such revision. No
consideration is being given to the major changes in the costing or production techniques that are
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occurring between the dates set for revision, the overall system is very rigid and that might make
the information irrelevant. The third game is named as the “Methods Change Variance Game”,
that highlights the issues that are associated with inefficiency of the labor variance for the
company. The fourth game is the “Material Mix Game”, which highlights the issues associated
with material mix variance. The research questions have been stated below:
 What are the drawbacks that are associated with standard costing if there is no proper
updating of the information?
 What are the various ways in which the companies can reduce these drawbacks and
improve their overall position?
In case of second study it highlights the necessity of continuous updating the information when it
comes to textile industry. The authors are a manager in the textile industry and he highlights the
overall drawbacks that are associated with the present costing system of the company that
includes that the costing system is not accurate, the overall cost objectives of the company. The
author also highlights that the aim is to achieve the cost benefits that they desire of from the
organizations (Trieu, 2017). He has stated that the information needs to be updated on timely
basis. The management needs to set an objective for the automated mechanism for the collection
of data and manage the flow of that. The management also needs to manage the calculate the
variances and accurate cost estimates should be made and revisions of cost for the changes in the
business environment needs to be done. The following research questions needs to be stated-
 What are the ways in which the companies can update the present system for the textile
industry?
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 What are the drawbacks that the companies face when the information is not updated on
timely basis and makes the operations of the company irrelevant?
Similarities between the two articles
 Both the studies are focusing on the needs of the updating the information that the
management needs for standard costing and highlights what will happen if the
information is left redundant and not updated (Hansen, Otley, & Stede, 2003).
 Both the articles focus on methods by which they can improve the basis cost accounting
system for the organization so that they get the best result in terms of cost effectiveness
of the company.
 Both the articles have been well written and in a way highlights how standard costing is
important and how companies can make use of it.
Dissimilarities between the two articles-
 The first articles highlight the drawbacks of the standard costing system in a way that if
the information is not updated it would not it non-beneficial and the second article is
highlighting the overall increase in standards of the cost accounting system. Cost
accounting system needs to be developed and improved and same is highlighted in the
second article (Johan, 2018).
 The first article is related to the application of the standard costing for all the
organizations in normal and for other article it is especially related to the textile industry
as one and whole and focuses on improving the cost system in that.
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Specific Outcomes of the two articles.
From the above findings, there can be specific outcomes that can be stated by the articles and
can be used for various stakeholders in the country. These specific outcomes from both the
article is stated below-
1. The first article states that the information that the manager is using should be current and
accurate and should be highlighted and updated so that in future the managers can
function as per that and get the best results. It also states that the information needs to be
accurate and not ambiguous and same is stated in this article. It also highlights that the
standards should be set in a positive way and the management should take as much
actions as they may need (Cundill, Smart, & Wilson, 2017).
2. The article also states how companies can improve this position., by analysing the source
of information properly, by making sure that they are analysing the sources properly and
then taking decisions based on that (Axelsen, Green, & Ridley, 2017).
Outcomes of the second article has been stated below:
1. There are major issues in the textile manufacturing company Graniteville Company, and
they have issues with the present costing system of the company. It can be improved by
making the system better by automating it and documenting the system of cost
accounting for the company (Naci & Hasan, 2012).
2. The second outcome would be that they should try to insert the standard costing method
with relation to the budgeting goals of the company and form proper budgets and analyse
them accordingly for the company.
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Conclusion
Based on the overall analysis it can be said that standard costing is a very unique concept
and companies should use it accordingly. There are certain drawbacks that are associated with
standard costing that the companies need to take care of. Standard costing requires lot of cost and
effort which the organization needs to take care of and thus that would make it difficult for
companies to adopt this method. But overall it is highly recommendable for reduction of the cost
and improving the overall profits for the company.
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References
Axelsen, M., Green, P., & Ridley, G. (2017). Explaining the information systems auditor role in the public
sector financial audit. International Journal of Accounting Information Systems, 24(1), 15-31.
Calvasina, R. V., & Calvasina, E. J. (2017). Standard Costing Games that Managers Play. Journal of
Management Accounting Research, 12(2), 33-65.
Charles H, C., Giovanna, M., Dennis M, P., & Robin W, R. (2015). CSR disclosure: the more things
change…? Accounting, Auditing & Accountability Journal, 28(1), 14-35.
Covaleski, M., Evans, J., Luft, J., & Shields, M. (2003). Budegting Research Three Theoretical Prespectives
and Criteria for selective Integration. Journal of Management Accounting Research, 15(3), 3-49.
Cundill, G., Smart, P., & Wilson, H. (2017). Non financial Shareholder Activism: A Process Model for‐
Influencing Corporate Environmental and Social Performance. International Journal of
Management Reviews, 20(2), 606-626.
Delone, W., & Mclean, E. (2004). Measuring e-Commerce Success: Applying the DeLone & McLean
Information Systems Success Model. International Journal of Electronic Commerce, 9(1).
Eddy, C., Filip,R, & Warlop, L. (2004). The Value of Activity-Based Costing in Competitive Pricing
Decisions. Journal of Management Accounting Research, 16, 133-148.
Epstein, M. (2018). Making Sustainability Work. London: Routledge.
Giacomo, B., Kamalesh, K., & Giovanna, M. (2013). Descriptive, instrumental and strategic approaches to
corporate social responsibility. Accounting, Auditing & Accountability Journal, 26(3), 399-422.
Hansen, S., Otley, D., & Stede, W. (2003). Parctice developments in budgeting : An overview and
Prespective Research. Journal of Management Accounting Research, 15(1), 95-116.
Johan, S. (2018). The Relationship Between Economic Value Added, Market Value Added And Return On
Cost Of Capital In Measuring Corporate Performance. Jurnal Manajemen Bisnis dan
Kewirausahaan, 3(1).
Naci, T., & Hasan, O. (2012). The Measurement and Management of Unused Capacity in a Time Driven
Activity Based Costing System. Journal of Applied Management Accounting Research, 10(2), 43-
55.
Schoenberger, E. (2016). Environmentally sustainable mining: The case of tailings storage facilities.
Elsevier, 119-128. doi:http://dx.doi.org/10.1016/j.resourpol.2016.04.009
Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda.
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