Standard Costing and Target Costing

Running head: MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Name of Student
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Author’s Note

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EXECUTIVE SUMMARY:
This report provides complete insight about the standard costing and target costing method. The
report also discusses about the presence of vast difference between the standard costing and
target costing. Two articles are being compared to see which costing method is feasiable and
useful in this competitive business environment.

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Table of Contents
EXECUTIVE SUMMARY:................................................................................................1
INTRODUCTION:..............................................................................................................3
CHARACTERISTICS OF STANDARD COSTING:.........................................................3
LITERATURE REVIEW OF STANDARD COSTING ARTICLE:..................................4
TARGET COSTING:..........................................................................................................5
COMPARISON BETWEEN STANDARD COSTING AND TARGET COSTING:........6
LITERATURE REVIEW OF TARGET COSTING:..........................................................7
CONCLUSION:..................................................................................................................8
REFERENCING:.................................................................................................................9

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INTRODUCTION:
This report discusses about the standard costing and target costing methods.
This report also sheds light on the existing difference between the standard costing and
target costing. The analysis is further being supported using the two articles.
CHARACTERISTICS OF STANDARD COSTING:
Standard costing can be termed as an accounting system that assists the
management of the company to identify the differences between the actual price of the
company’s manufactured products and the costs that should have associated with the
actual goods produced. The costs that are associated with the actual goods produced
are known as standard costs. This cost is one of the integral parts of the company’s
budgets and profit plan. The attributes of the standard costs includes direct material,
direct labor and manufacturing overhead. The general ledger accounts of the company
and cost of goods sold part of the company includes standard costs. The importance of
the standard costs is immense as it includes actual good output. If in any situation the
company spends more in direct materials or direct labor or any kind of manufacturing
overhead then the company may experience loss or may not reach the desirable net
income. To tackle such problems the management of the company needs to take care
about the production inefficiencies or the higher input costs. The standard costs needs
to be adjusted for the variances because as per the historical costs principle the
presence of the standard costs in the inventories and the cost of goods sold needs to be
adjusted. (Aman et al 2016) Thus, it can be determined that the importance of the
standard costs is immense especially for the manufacturing companies.
The main characteristics of the standard costing are that the cost is a pre-
determined or pre-planned cost decides by the management of the company. The
standard costing is being fixed even before the commencement of the production. For
example, if the company is determined to start production cycle in 2019, then the
company calculates the standard cost in 2018.
The standard cost always depends on efficient operation of the company. The
efficient operation of the company depends on the management, as they set the
operational rules that determine the degree of management skills. The management
needs to select the standard cost, which is much closer to the actual cost of production.
For example, if the capability of the company is to provide 80% efficiency and the
management fixed the standard cost at 90% efficiency rate then the company may face
problems.
Standard cost can be used as the base for the price fixation. It can also be used
as the tool to exercise control over the overall cost and production process of the
company. Thus, management uses the standard cost to keep control over the
production process of the company.
Standard costing also includes the standard setting arrangement for other
elements of cost. This is the reason that the standard costing are being set for labor
costs, material costs and overhead costs. The management needs to be very careful
about the setting of the standard for standard costing. If the management of the
company sets a different standard than it is expected then sales and profits of the

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company will be under the scrutiny (Thomas and Gilbert 2014). The very reason for
setting the standard is to make comparison between standard performance and actual
performance.
The standard costing always needs to consider the actual performance of the
company, so that the comparison between the standard performance of the company
and the actual performance of the company can be made easily.
Standard costing is the one that looks after the comparison between the standard
costing and actual costing of the company. It is due to the standard costing the
dissimilarity between the standard costing and actual costing worked out. The
dissimilarity between the actual performance and standard performance needs to be
analysed by the management of the company.
Though both the estimation cost and the standard cost are the future cost, still
the management of the company should not perplexed the standard cost. The
development of the standard cost of the production cycle of the company needs to very
technical. The company also needs to make detailed analysis about the standard
costing (Adeleye et al 2014).
Standard costing has considerable effect on the budgeting process of the
company. Based on the standard cost the management of the company creates a
budgeting plan for that financial period.
LITERATURE REVIEW OF STANDARD COSTING ARTICLE:
The relevance of the standard costing in the manufacturing organization is
immense. It can be verified from the case study written by Paul Eisnberg (2012) on the
implications of the standard costing system in manufacturing organizations. In the case
study the author states that the operation manager of ASL company identified that the
reason behind the decreasing sales revenue is the improper guess about the standard
costing (Paul 2012). As per the operation manager of ASL Company, there is a great
difference between standard costing and actual costing. Though the adoption of
standardization system for the production process of the company fetched a
considerable amount of revenue, still the company was not able to make the impact that
was expected in the beginning of the financial year. The standardization system had
assists the company to save considerable amount of cost, which led the company to
experience profits in that financial year. The guess of wrong standard cost in the
beginning of the year decreases the progress of the company. The individual demand of
service from the customer was also being disturbed due to the setting of the wrong
estimation of the standard costing. As per the Operation Manager these were the prime
reasons that affected the sales revenue of the company. The opinion of the Operation
Manager is being assessed by the Chief Financial Officer of the company. To analyses
the opinion of Operation Manager the Chief Financial Officer started to evaluate the
advantages and disadvantages of the implementation of the standard costing. To
analyses the advantages and disadvantages of the standard costing system the
management of the company started to analyses the revenue and expenses of the
company. The management of the company started investigating from the costs that are
associated with the material, staff and other expenses of the company. As per the
analyses made by the management of the company, it can be determined that the
estimation of the prices, materials and labor usage were not correct. The weighted

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average costs and production volume were also estimated in a wrong way. The
management of the company also stated that the inventory valuation of the company
was not similar to the actual performance of the company. There is a considerable
number of variances that can be identified between the standards and the real costs of
the company. Thus, it can be concluded that the cost control system, performance
evaluation and pricing of the product consists of huge variance.
The management of the company also stated about the advantages of the
standard costing system that assists the company to gain considerable amount revenue
to the company. As per the management of the company the budgeting system of the
company has been improved. The changing process of supplier can be done without
any hassle. The standard costing also helped the company to have better material
process. The standard costing is the partially responsible for motivating the staff. It is
mainly done by reducing the variances and increasing the efficiency of the production
process of the company. Standard costing assists the management to save
considerable amount of time and costs.
In spite of having great advantage, the management of the company also found
limitation of standard costing. As per the management of ASL company, standard
costing allows for idle time and waste, which does not fit in the modern production
techniques like Just in Time and Total Quality Management.
As per the operation manager the standard costing has the ability to make the
company strive for the financial and operational improvement through better cost control
and cost cutting. The leadership strategy of the company also needs to be changed by
considerable means. The Operation manager also suggested that the company should
retain standard costing as a starting point to access and control cost of production.
As per the above discussion it can be determined that the article mentioned in
this section satisfy all the characteristics of standard costing. ASL started using the cost
control technique which is an integral part of the standard costing. The creation of the
servicing activities along with appropriate pricing also assists the company to increase
their sales revenue. The company also implemented cost cutting strategy that assist the
company to become more efficient in terms of the revenue.
TARGET COSTING:
Targeting costing is one of the methods of costing, which also one of the integral
part of the management technique. Target costing can be defined as the costing system
that assists the company to plan in advance for the price points, margins and the
product cost of the new product. Target costing is considered to be a powerful tool that
assists the management of the company to continually monitor the products from the
design phase to ending process, which means it helps to monitor the entire life cycle of
the product. Target costing is considered to be the most important tool that assists the
manufacturing organization to experience continuous profitability (Lee et al 2014). The
implementation of the target costing in the organization requires to take considerable
amount of step. The steps to implement the target costing are as follows:
 The company needs to conduct thorough research.
 The management of the company also needs to calculate the maximum
cost.
 To monitor the ongoing activities of the company.

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The main objective of the target costing is to assists the management of the
company to use proactive cost planning, cost management and cost reduction
processes. The target costing calculates the cost in the early stage like in designing
stage or during the development stage of the product.
The market price of the product depends on the market conditions and hence the
company cannot control the market price of the product. Thus, target costing does not
consider to alter the market price of the company.
While measuring the target costing the company often uses target selling price of
the product because it determines the profit margin of the company. Thus, management
of the company sets the selling price after the production process is complete.
The management of the company also considers the cost reduction strategy of
the product. The effective cost management is also one of the integral part of the cost
reduction strategy as it assists the company to increase their revenue by considerable
means.
To formulate the total selling price of the company the management of the
company needs to consider the target costing. The other major attribute for calculating
the selling price are product design, customer expectations and specifications.
The management of the company needs to consider the current cost while
calculating the cost reduction, which is also the ultimate goal for targeting costing.
COMPARISON BETWEEN STANDARD COSTING AND TARGET COSTING:
Standard cost and target cost are two different attribute of cost reduction. Both
standard costing and the target costing are stated as an useful for the management. In
spite of having striking similarity and almost same kind of objective the standard costing
differs from target costing. The difference between the target costing and standard
costing are as follows:
Standard costing is one of the oldest methods that the organizations around the
world use for controlling the cost. Target costing is the modern methods that the
company uses to reduce the cost.
Standard cost is the pre-planned cost that is based on the estimates relating to
the material, labor and manufacturing overheads. The estimation is done for a specific
time period. Target costing, on the other hand, is the difference between the target
prices that is paid by the potential customers. Target costing also deals with reasonable
profits.
Standard cost is the future predication of the cost of the product that the
company required while creating the single product line. On the other hand, target
costing is the tool that assists the company to sustain in the competitive business world.
Target costing also assists the company to maintain its profitability in future.
Standard cost is the tool that the management of the company uses to control
the cost as much as possible. Target costing, on the other hand, is the tool that the
company uses to reduce the cost in the existing level (Sullivan 2015). Target costing
also assists the management of the company to create a design for the various stages
of the product life cycle.
Business organizations around the world usually develop the standard costing
during the development stage and develop target costing during the production stage,
so that the reduction of the cost is possible.

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LITERATURE REVIEW OF TARGET COSTING:
Target costing is considered to be one of the most relevant costing systems in
this competitive business environment. To analyses the relevancy of the target costing
an article written by David Alvarez on target costing at Toyota. The author basically
analysed the expectations of the Japanese executives and Western executives from the
available cost information. The managers in the Western countries basically expects to
make decisions about the pricing and investments from the cost information, while the
managers form Japan expects to control costs from the cost information. It is evident
from a Japanese company Toyota that the utilization of the cost information is pretty
different in comparison to other western companies. The author of this article stated
that Toyota uses the cost information to reduce the cost of the company. The company
basically plans for the reduction in cost during the designing stage.
Toyota usually sets goals for the reduction of cost at the first step then plans for
achieving new targets. In pursuit to reduce the costs the company usually runs rigorous
test for judging the cost behind the old production line and new production line. This
provides a complete idea to the management of the company about the reduction of
cost. The company follows same procedure while implementing new cost techniques in
the system.
Toyota also considers the retail price of the product and future sales volume of
the product depending on the historical data before creating the cost plan. Thus, the
cost plan depends on the product plan and targeted retail price. To analyses the target
cost of the product the company often subtracts the target price. The cost planning often
made by the company three years prior of launching new model (Martin 2020).
Toyota does not estimate the cost by simply adding the cost that is associated
with previous model, but sums the cost variations of the new model and the old model.
This technique also beneficial in terms of cost fluctuations that assists the different
divisions of the company. The technique also assists the company to reduce
considerable amount of variable cost like wages and indirect costs. Thus, the company
can use the cost plan and made decisions regarding the improvement of design and
production volume.
The company manages the cost after analyzing the capability of each
departments of the company. The capability are being analysed after the meeting
between the management of the company and other department heads. Thus, the cost
reduction planning is made after the meeting and before the launching of the new
production line.
Thus, author clearly explained the benefits of the target costing in its article after
analyzing the steps taken by the company in pursuit to reduce the costs. The author
also suggested that the low cost will enable the company to attain more profit in a single
financial period.
CONCLUSION:
After analyzing both the article it can be determined that target costing is the best
for the competitive world. The controlling efficiency of the target costing is one of the
major attribute. The company like Toyota is found to be benefitted from the target
costing method. As per the analysis it can be determined that the company not only

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reduces the cost of their product and increase their profitability, but were also able to
bring considerable amount of control in the company. Toyota uses the cost reduction
technique to analyses the capability of each divisions in their company. The
implementation process of the target costing of the company also assists the company
to analyses several procedures of the company.
Standard costing, on the other hand, assists the company to bring control over
their system by analyzing the historical data. The company often calculates the
standard cost based on the cost that is related with direct material, direct labor and
other manufacturing overhead. The process of the standard costing involves many
critical procedures. It is evident from the standard costing article that the method has
many disadvantages. Among the disadvantages the most prominent one is that the
standard costing depends on the historical data and omits the current market situation.
The current market situation is one of the most integral parts of the cost planning as it
provides the present situation of the industry. The standard costing actually focuses on
the future predications and depending on the predications the company usually takes
decisions. The implications of the standard costing in the modern competitive world
found to be inefficient as it omits the market data.
The implementation of the target costing in a company is much more efficient as
it considers the present market data and also considers the capability of the different
divisions of the company. Thus, it can be concluded that target costing is much more
efficient than the standard costing, as it assists the company to sustain in this
competitive market. The target costing method provides better control than the standard
costing.

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