Managerial Accounting Report: Standard and Target Costing

This report delves into the realm of managerial accounting, focusing on standard costing and target costing methodologies. It begins by defining standard costing and its role in planning and control systems, including its application in budgeting, cost management, and performance evaluation. The report then explores the implementation of standard costing systems, highlighting the benefits and requirements for companies like Active Sports Life (ASL). It discusses the cost management challenges faced by ASL, particularly concerning differentiation strategies and the limitations of standard costing in dynamic business environments. The report also examines the target costing method, its strategic cost management approach, and its application in IIT Inc. Finally, it offers recommendations for effective costing systems, including process costing and job costing, providing a comprehensive overview of costing methods and their practical application in real-world scenarios.

Running head: MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................2
Standard Costing in Planning and Control System....................................................................2
Implementation of Standard Costing System.............................................................................4
Cost Management Challenges faced by the Active Sports Life.................................................6
Targeted Costing Method in IIT Inc..........................................................................................7
Recommendations......................................................................................................................9
Process Costing......................................................................................................................9
Job Costing...........................................................................................................................10
Conclusion................................................................................................................................10
References................................................................................................................................11

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Introduction
The report consists of the features related to the standard costing which has been
explained in the planning and control system. The organizations that has been selected for the
explanation of the use of standard costing and target costing are Active Sports Life (ASL)
and IIT Automotive. After the discussion of the standard costing, a comparison has been done
with the target costing and the use in the today’s world is being evaluated in this report. In the
last part, recommendation has been provided with the two system that can be used in costing
with the references of Active Sports Life (ASL) and IIT Automotive.
Standard Costing in Planning and Control System
The standard costing can be defined as a tool which an organization uses for the
budget planning and it does help in controlling and managing the costs which has also
benefitted in estimating the performance and analyzing the cost management (Lowe 2019). In
the system of standard costing, the costs that are included are of staffs, materials and there are
also other costs included that helps in the establishment of estimation price of the
management, and usage of material and labor usage, as well as the volume of production and
budgeted overhead costs (Vijay et al. 2016). There are certain uses of standards that has been
used for inventory valuation and it is being compared to the actual costs. There is an
involvement of the cost that has been estimated which is usually required for the process of
production. There is determination of the accounting standards that has been set before the
accounting period begins which is usually related to the amount and it is also been required
for the process of production (Sargento et al. 2018). The standards that has been used are also
for planning the budget and related to production.

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There are certain involvements in the standard costing in an organization where the
actual costs are being recorded. If the actual costs are being compared to standards costs, then
the variance will be found easily with the help of standard costing. Thus, the analysis of
variance is being found very easily. The management team helps in analyzing the variance
and after that it will be done by them which is being necessary and need in that organization.
The direct material costs and amounts is evaluated at the end of financial period. There has
been a utilization of actual amount and the pay rate of the direct labor that has been set earlier
(Hunter et al. 2016). The variance that has been examined are being done by the difference
between the actual costs and standard costs, this will help the managers so that it will help the
look which the costing has been implemented in the organization which does help in
management cost and the operational efficiency is also been improved.
The standard costing has many features through which the organization can get
benefitted, as there is budgetary control at the time of operation. The organization can help in
performance evaluation and also help in suggesting that in which way it will be beneficial for
the organization (Gc et al. 2018). The labor suppose it is overloaded, then it will further help
in the economic appeal. There are certain factors which help in the motivating employees
within the organization so that it helps in the improvement of performance and help in setting
standard of that particular organization. The important information is being sent by
management team of organization and the element are there that are related to the costs which
will be included in the quotations that will help in fixing the price in which the buyers will
but the product of that particular organization (Maskell, Baggaley and Grasso 2017). It can be
used for controlling the price, that will help the management and a proper valuation can be
made upon the finished products and work in progress which has been included in the
inventory. At the time of fixing the prices, it will help in taking any decisions that will help
the management personnel will in future will benefit the particular organization.

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Implementation of Standard Costing System
At the time of implication of the standard accounting system, there are certain
formations which does help in making the standard and also help in the controlling the cost of
the organizations, the standards are usually in the form of numerical (Dugdale 2017). From
the standards that has been set it does help in cost control. At the time of operation in
organization, there are several stages which has been applied so that it helps in ensuring that
all the standards that has been set are meeting the requirements. The benefits that Active
Sports Life (ASL) gets in consideration of the standards costing system are:
 There are particular standards that help in improving the way of budgeting.
 The staffs and management people is motivated so that it helps in the reduction of
variances and in result of that there is an increase in efficiency and cost control.
 There is a possibility that there can be change in suppliers and better raw material can be
provided and the processes that has been implemented are done so that it can meet the
purposes of costing.
 There are certain exceptions by the people of management, which is allowed to take
action only if the variances are being moved beyond the limits that can be considered by
the organization and hence it will help in saving the costs and time of management.
 If the standard cost data sheet is being provided, then it will help in reporting inside the
management people and also helps in decision making.
There are some requirements of the Active Sports Life (ASL) which has been listed
below:
 Quick response to the need of individual consumers.
 Reduction in the cost of production.
 Continuous growth and improvement.

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 Services provided to the consumers and individuality.
 Growth in sales.
In this part of this assignment, it will be discussed here if the standard costing system
is addressing all the requirements of Active Sports Life (ASL). The organization is used to
strive for both the operational and financial improvement that can be achieved with the use of
standard costing that will help the future in better cost control (Bargerstock and Shi 2016). If
we discuss about the operational management, there are some improvements that can be done
at the time of operation. The current technique that is being used in Total Quality
Management (TQM), will help in focusing more on the relationship of consumers instead of
more focusing on the process of production. In Active Sports Life (ASL), with the output the
efficiency is usually not measured, but it is being checked by the complaints that is being
done by the consumers, any returns done by them and if rework is being done (Ahrens 2018).
Hence, from the look of the Total Quality Management (TQM), there are major
improvements which is being done on achieving the need of the consumers which have a met
better and better (Shi 2016). As per the Operation Manager of the Active Sports Life (ASL),
for the customer service there are cost cutting which can be achieved with that.
Active Sports Life (ASL) is achieving success with the help of the perfect strategic
approach. The strategy of cost leadership helps in get a perfect focus on cost reduction. This
is very meaningful as it helps in the cost reduction as it there is mass manufacturing done in
which it is seen that the customer service is not the key (Zhang 2018). Active Sports Life
(ASL) can approach different strategy so that they can help in satisfaction of the consumers
which will be approached in a different way so that they can beat the consumers. The
approach that has been given by the organization will be taken by the consumers and they
will have to pay a premium price to get access of the services (Bargerstock and Shi 2016).
There are several approaches that are being done responding upon the individuality of

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consumer. In following several strategies, there are usually a struggle that is to be faced by
the organization. Thus, it somehow faces difficulty on saving the costs and in providing
various products which is differentiated and services that are provided which is on same
period (Nowak 2016). From the report of Active Sports Life (ASL), it can be seen that there
is a reduction in the sales revenue. It has been described that there are cost reduction which is
used at the time of producing the uniform goods. Hence, the consumers faced a poor service
from the organization which is being taken in the low cost policy. Accordingly, the
consumers are getting disappointed from buying the products of Active Sports Life (ASL).
Thus, the standard costing does helps that is being needed by the organization and there is
decrease in the sales revenue.
Cost Management Challenges faced by the Active Sports Life
There are certain challenges that are faced by the Active Sports Life (ASL), in
applying the costing method, which helps in the cost control abilities. There are use of
differentiation strategy which does help in the success of the organization and it does not
depend on the reduction of the costs (Melo and Granja 2017). All the cases are dependent
upon the environment business and it is not stable and are nor predictable.
All the benefits that the standard costing system gives has been discussed, but there
are also some of the limitations which has been found from a report of Active Sports Life
(ASL). All the points that affect the standard costing system are discussed below:
 There are certain costs that cannot be avoided, and the costs are being set much higher.
Thus, seeing this the employees gets demotivated and it resulted in adverse variances.
 Most of the standards that has been set can be manipulative so that the organization can
achieve positive variances. Suppose, if there is an estimation of the high costs, then it will

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help in achieving the cost that will be beneficial and also help in savings, thus such
manipulations can be undermine by the efforts that are being controlled.
 There is an allowance of the standard costing in which it has an idle time and waste, it
acts as an odd in the modern production i.e. Just-In-Time and Total Quality Management
(TQM).
In the report of Active Sports Life (ASL), it has been observed that the cost technique
has not been implied very efficiently and there is need of continuous monitoring so that it
does help in continuing the operation (Jayaraman 2016). If Active Sports Life (ASL) does
want to maximize the structure of the profit, then they have to have a specific strategic plan
so that they can have some cost cutting without degrading the quality. At the time of
implementation of the costing standards, the staffs and employees should have a clear idea
about the processes that will help the organization to get the full utilization. There will be
training given to the employees of the organization through various workshops and also with
the seminars so that they can get an idea about the thing that has been happening so that they
can achieve their desired results.
Targeted Costing Method in IIT Inc.
Target costing is the method which has its use on the strategic cost management,
which is usually price driven, center designed and customer focused. In targeted costing, it
cannot be commenced until and unless the production has been started (Ahn, Clermont and
Schwetschke 2018). There is need of a particular cost management that will help in the stage
of product planning, designing of the product and production stage. In designing the products,
IIT Inc. try to lower the cost in that segment that will help in realizing the best sources of cost
savings, which is usually before the product has been reached in the stage of production. In
target costing, it does focuses on the various functional area of IIT Inc., in which the

MANAGERIAL ACCOUNTING
transaction is being operation is being carried on. To make target costing be effective, there is
a need for the form the several teams that are being comprises of product designing,
purchasing, finance, cost targeting, comprising engineering, production, sales, cost
accounting which is all related to the consumers and suppliers (Hamid and Mansour 2016).
There are support from the upper management level, that is being very crucial for the target
costing success which is usually based on the resources that is need to be allocated. The
target costing is being differentiated from the traditional costing method, by cost minus plus
(College.cengage.com 2020). Moreover, in the target costing the cost is being determined
before the design is being set for the product. Thus, the equation for the target costing is:
Target Price – Target Profit = Target Cost
The factors that has been considered that at the time of computing selling price in
future of the product that has been proposed should be included in the utility of the product,
help in projecting the dales volume and also keeping a focus on the quality of product (Al and
El 2016). As there is a much higher competition in that market region, there is much less
flexibility at the time of setting the price of product. There are some other cases, where target
cost of the downstream organization is the target price of the upstream organization. Due to
the management policies and the market pressure the prices at which the product is being sold
and the margin of profit is being set fixed (Clifton et al. 2019). Thus, it reduces the
production cost of IIT Inc., which can be seen that it was the only source in increasing the
earnings. At the time of computing the target costs, this will be assigned at the time of
assembling the product finally, and the components is being set before the designing. After
designing the product, the cost of production is being estimated, then it is being compared to
the targeted that has been assumed (Anghelache et al. 2019). Suppose, if the cost that is being
assumed that is being much higher than the targeted costs then there is an implementation of
the value engineering which will help the IIT Inc. in achieving the target that has been set.

MANAGERIAL ACCOUNTING
The term value engineering can be described as the process in which there is a cross
functional team which will help in attempting to reduction of the costs at the time of design
and stages of preproduction and it is also been taken care of that there is no loss in the quality
and the utility of the optimal process, materials and machinery which are the things that is
needed for the purpose of production.
Recommendations
In an organization, there are various costing methods that is implemented in
organizations which help in the production and operation. Two of the common methods of
costing that can be recommended to the Active Sports Life (ASL) and IIT Inc. are, one is
process costing and the other one is job costing. These are the two methods which will help
the organizations in achieving the growth and also helps in increasing revenue.
Process Costing
The process costing is a process that usually helps in the production process and the
products that are homogenous in nature and in the cost of product. The process costing is
mainly depended upon the production of products in the organization (Üç and Elitaş 2016).
The organizations can use different type of process costing as it is of three types weighted
average costs, standards costs and first-in and first-out costing (FIFO). This costing method is
usually used as it helps in determining the cost of product in various industries. In
implementing this procedure there is almost same of entries that is being used in the
environment of job costing (Clifton et al. 2019). There is no need of restructuring the
accounts that has been recorded in the accountant. This is much easier to switch over from
the current process of costing to the job costing, as it is a hybrid approach that is being used
for various portions of several systems.

MANAGERIAL ACCOUNTING
Job Costing
Job costing usually helps in managing and tracking the process that is being
controlled and also benefit in categorization of management processing. The costs are mainly
associated with a particular purpose of job or if there is a project going on that helps in
further categorization (Pollard 2018). The categorization of the costs is being related to the
labor, materials, equipment’s, contracts etc. The purpose of this implementation of the
costing is to have a track on the progress of jobs, improving the estimation and scheduling
process that is being discovered where the cost is being estimated that can vary from the
actual costs. At the time of implementation of the job costing, there are three P’s that are
Plan, Practice and Probe.
Conclusion
From the above discussion, about the implementation of the standard and targeted
costing in Active Sports Life (ASL) and IIT Inc. it can be concluded that it does help the
organizations in cost cutting and earning more revenue. The standard costing is being used so
that it does help in the cost leadership strategy and also helps in the cost control abilities. All
the benefits and the limitations that has been done are mentioned here and it also help in
retaining the efficiency of manufacturing process. The recommendations which has been
provided includes the process costing and job costing which will help the process of
production and takes much less time in that. The recommended costing process helps in
analyzing the non-productive activities and also helps in creating a value chain and also
keeping focus on the services that the consumer wants. There will be adjusting of costs which
will ultimately allow to lower the price of the products that is being manufactured. If the
value is being preserved carefully by the management team, then it will be beneficial to carry
on the pricing which is being appropriate to increase the sales.

MANAGERIAL ACCOUNTING
References
Ahn, H., Clermont, M. and Schwetschke, S., 2018. Research on target costing: past, present
and future. Management Review Quarterly, 68(3), pp.321-354.
Ahrens, T., 2018. Management controls that anchor other organizational
practices. Contemporary Accounting Research, 35(1), pp.58-86.
Al-Qady, M. and El-Helbawy, S., 2016. Integrating Target Costing and Resource
Consumption Accounting. Journal of Applied Management Accounting Research, 14(1).
Anghelache, C., Căpușneanu, S., Topor, D.I. and Marin-Pantelescu, A., 2019. Target Costing
and Its Impact on Business Strategy: Computer Program for Cost Accounting and
Administration. In Network Security and Its Impact on Business Strategy (pp. 20-43). IGI
Global.
Bargerstock, A. and Shi, Y., 2016. Leaning away from standard costing. Инновации в
менеджменте, (2), pp.4-11.
Bargerstock, A. and Shi, Y., 2016. Leaning away from standard costing: Lean companies
need value stream costing and new performance metrics. Strategic Finance, 97(12), pp.38-46.
Clifton, M.B., Townsend, W.P., Bird, H.M. and Albano, R.E., 2019. Target costing: market
driven product design. CRC Press.
Clifton, M.B., Townsend, W.P., Bird, H.M. and Albano, R.E., 2019. Target costing: market
driven product design. CRC Press.
Dugdale, D., 2017. Management control systems: Theory and lessons from practice. In The
Routledge Companion to Performance Management and Control (pp. 11-38). Routledge.

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Eisenberg, Paul. (2016). IMPLICATIONS OF STANDARD COSTING SYSTEM IN
MANUFACTURING: A CASE STUDY. Journal of Applied Management and Investments.
5. 162-165.
Gc, V.S., Suhrcke, M., Hardeman, W., Sutton, S. and Wilson, E.C., 2018. Cost-effectiveness
and value of information analysis of brief interventions to promote physical activity in
primary care. Value in Health, 21(1), pp.18-26.
Hamid, F.A.H. and Mansour, F.E.H., 2016. The Impact of Target Costing System on
Enhancing Company’s Performance.
Hunter, R.F., Brennan, S.F., Tang, J., Smith, O.J., Murray, J., Tully, M.A., Patterson, C.,
Longo, A., Hutchinson, G., Prior, L. and French, D.P., 2016. Effectiveness and cost-
effectiveness of a physical activity loyalty scheme for behaviour change maintenance: a
cluster randomised controlled trial. BMC public health, 16(1), p.618.
Jayaraman, R., 2016. Project cost control: a new method to plan and control costs in large
projects. Business Process Management Journal, 22(6), pp.1247-1268.
Lowe, E.A., 2019. On the idea of a management control system: integrating accounting and
management control. Management Control Theory, p.63.
Maskell, B.H., Baggaley, B. and Grasso, L., 2017. Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press.
Melo, R.S.S.D. and Granja, A.D., 2017. Guidelines for target costing adoption in the
development of products for the residential real estate market. Ambiente Construído, 17(3),
pp.153-165.

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Nowak, E., 2016. Deviation analysis as an instrument of cost control in an
organization. Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu, (434), pp.140-
147.
Pollard, W.B., 2018. An Active Learning Approach to Teaching Job-Order
Costing. Management Accounting Quarterly, 19(4), pp.10-10.
Sargento, A., Querido, A.I.F., Carvalho, H., Santos, I., Reis, C., Maximiano, M., Frederico,
M., Bernardes De Oliveira, S.M. and Leal, S., 2018. Defining clinical conditions in long-term
healthcare as a first step to implement Time-Driven Activity Based Costing (TDABC). BMC
Health Services Research, (18 (2)), pp.75-76.
Shi, Y., 2016. LEANING AWAY FROM STANDARD COSTING. Strategic
Finance, 97(12), p.38.
Üç, M. and Elitaş, C., 2016. Life cycle costing for sustainability. In Handbook of research on
waste management techniques for sustainability (pp. 96-107). IGI Global.
Vijay, G.C., Wilson, E.C., Suhrcke, M., Hardeman, W. and Sutton, S., 2016. Are brief
interventions to increase physical activity cost-effective? A systematic review. Br J Sports
Med, 50(7), pp.408-417.
Zhang, H., 2018. Development of cost management and aided decision system for casting
enterprises based on ERP. In ITM Web of Conferences (Vol. 17, p. 03010). EDP Sciences.

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The articles from where the literature review is being done are stated here:
Active Sports Life (ASL)
Eisenberg, P., 2016. Implications of Standard Costing System in Manufacturing: A Case
Study. Journal of Applied Management and Investments, 5(3), pp.162-165.
Paul Eisenberg, L.L.M., IMPLICATIONS OF STANDARD COSTING SYSTEM IN
MANUFACTURING: A CASE STUDY.
IIT Automotive
College.cengage.com (2020). [online] College.cengage.com. Available at:
http://college.cengage.com/accounting/resources/students/readings/geier.htm [Accessed 13
Jan. 2020].