HI5017 Managerial Accounting Report: Woolworth's Costing Analysis

This report examines managerial accounting tools, focusing on standard and target costing methods used by Woolworth. It begins with an introduction to management accounting and its importance in decision-making. The report then details the features and relevance of standard costing as a planning and control system, explaining its benefits in cost savings and effective decision-making within a company like Woolworth. Target costing is also explored, with a comparison drawn between the two costing methods, highlighting their differences and applications. The report further discusses the relevance of target costing in an uncertain business environment, analyzing its limitations, especially for large companies. Finally, it recommends the use of standard costing for control purposes, emphasizing its benefits over target costing in the competitive business landscape. The report uses various articles and reviews to support its findings, providing a comprehensive analysis of costing methods in a real-world business setting.

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Woolworth
Managerial Accounting
1/8/2020

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Contents
Introduction........................................................................................................................2
Features of standard costing.............................................................................................2
Relevance of standard costing in company Woolworth....................................................3
Target costing and its comparison with the standard costing...........................................4
Target costing in uncertain business environment............................................................4
Recommend for control purpose in company Woolworth.................................................5
Conclusion.........................................................................................................................6
References.........................................................................................................................7

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Introduction
The report is made in regard to the tools of management accounting so that effective
decisions in the company can be taken. In contemporary and real-life companies, the
use of a management accounting system is essential as it helps in achieving the goals
of the business. The report will describe the two costing methods which are the
standard costing and the target costing in the real-life company Woolworth (Abdullahj, et
al., 2015). The features of the standard costing as the planning tool and the control
system will be stated. The target costing will also be explained and its relevancy in the
uncertain business environment.
Both the costing system faces many challenges that will be stated in this report and
their relevancy will also be answered. The comparison of these two costing methods will
be done in this report and best will be recommended to use by the company for control
purposes (Helms, et al., 2015). Standard costing helps in saving the cost of the
company and taking the effective decisions of the company whereas the target costing
is related to the plans in the advance to achieve the new product and it plans the cost
related to the margins, product cost, and the price points.
Features of standard costing
Standard costing is the management accounting tool that helps in doing the proper
planning and also supports in monitoring the cost. It is the predetermined cost of the
production process which helps in controlling the cost of the company. Standard costing
helps in saving the cost of the company and taking the effective decisions of the
company. It is the management tool related to the variances in which standard cost is
compared with the actual cost (Tabitha and Oluyinka, 2016). Features of standard
costing as a planning and control system are stated below:
 It is considered as the predetermined cost of the company which means the cost
is selected before the starting of the production or the operations of the company.
If the company is launching a new product or introducing some new technology
then they are aware of the costs which will indulge earlier. So if the company the
product this year than the cost will be determined or evaluated earlier means in
the previous year.
 It is not the estimated cost of the company as it is the actual cost of the
production (Novák and Popesko, 2014). It is the planned cost and it is an
important feature of the standard costing that this cost is the variation of what
should be the cost in the company instead of what would be the cost in the
company.
 The standard costing is evaluated after considering the efficient operations of the
company. So it is computed after considering the standard cost fixed. There are
several elements of the cost which are included in the standard costing.
 The actual deviations can be found out through the comparison of the standard
costing through the actual performance. The standards are set not only for the
cost but also for the profits and sales. So with the help of a standard set, the

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comparison can be done easily (Do, et al., 2014). The dissimilarity between the
actual and standard is known as the variance and it is evaluated to analyses the
reasons behind the same.
 After evaluating the dissimilarities between the actual and standard, certain
corrective actions are taken so that variances cannot be repeated anymore. The
reasons behind the differences in the variances are found out and immense
actions are taken so that performance in the organization can be improved
(Briciu and Căpuşneanu, 2013).
The relevance of standard costing in company Woolworth
As per the article (Armitage, et al., 2014), the use of management accounting practices
should be done not in large organizations but also in the short and medium
organizations. SME plays a significant part in the economy so modern management
accounting practices like standard costing should be used by them so that effective
decisions in the company like Woolworth can be taken. The large companies indulge
their cost in many operations so they need to control their cost so that standard costing
is very effective as it helps in planning cash flows. The budgets are made to control the
cost and it helps in enhancing the performance of the Woolworth company.
In the reviews of the author standard costing is an effective tool as it helps in use for
planning the cash flows and controlling the cost of the company. To analyses, the
competitive position in the market standard costing is very essential to be used as it
helps in doing a comparison of the actual with the standards (Vasile and Croiteru,
2013). According to the author, standard costing improves the productivity and
efficiency of the company as they are useful accounting tools for taking decisions and
managerial planning. The production cost of the Woolworth Company gets reduced with
the help of the standard costing and it also helps in measuring the inventory.
According to the author, with the help of the standard budget, the company can prepare
the actual budgets which help in taking the planning in the appropriate way. The top
management of the company Woolworth can take important decisions through this
costing and also estimate the cost by bidding on the jobs. The important functions of the
company such as marketing, manufacturing, accounting, etc. are done in an effective
way as standard costing coordinates all these functions. The goals of the company can
be easily achieved by setting the standards as it helps in defining the targets (Dimi and
Simona, 2014).
The features described above were clearly stating the article reviews as the author is
also stating that the standards are set not only for the cost but also for the profits and
sales and it helps in comparing the standard with the actual performance. The feature of
standard costing is also the maintain record keeping so as per the author also standard
costing helps in reducing the cost and carry the inventory at the standard cost.
For example, standard costing is majorly used in large companies as it helps in
achieving the strategic effectiveness and this technique helps in reducing the cost of the
company and also helps in making effective plans.

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Target costing and its comparison with the standard costing
The life cycle cost of the product is determined through the target costing and it should
be sufficient to the quality and functionality. This costing method mainly ensures that the
desired profit of the company is achieved. Target costing is evaluated through minus the
desired profit of the company through the market price. It is the costing that is planned
in the advance to achieve the new product and it plans the cost related to the margins,
product cost and price points (Pazarceviren and Celayir, 2013). For attaining higher
profitability in the dynamic environment this accounting tool is very effective as it
monitors the products. Target costing has the life cycle so they observe the product
started for the design phase until the product goes through with the whole life circle. The
target cost calculates the maximum cost which can be occurred for producing the new
product.
Standard Costing Target Costing
It is the predetermined cost of the
company.
It is the desired cost of the company.
This costing works under the specified
conditions such as working conditions
should be normal or actual so that
standard can be achieved.
In the current working condition, this
method of costing does not work and
requires changes in the production cost.
The prices and the profits are not
considered while evaluating this costing as
standard costing focused inwardly.
It is evaluated by deducting the required
profit with the external selling prices and
then backward.
This cost is evaluated for the existing
products and services.
This cost is evaluated for the products that
have the design phase (Barbole, et al.,
2013).
It is the internal tool which is based on the
price determination.
This cost is derivative from the outside
market price and requires market research
and understanding.
This costing focuses on the cost control
and it is a reactive technique in which
margin is added.
This costing focuses on the cost reduction
technique and it is a proactive technique in
which products are designed.
In standard costing financial reporting and
GAAP are followed (Okpala, 2016).
In target costing management accounting
is followed and profit margin contribution is
taken.
Target costing in an uncertain business environment
In most of cases target costing is not that much competitive as comparisons to the other
costing methods. In the article (LIMA, et al., 2014), it was mentioned by the author that
target costing is majorly benefited to the agribusiness only and it enhances their
productivity and ability. In an uncertain environment, it gives a competitive advantage
but there are important managerial accounting tools such as Product life cycle costing,
ABC costing, the total cost of ownership which are much beneficial.

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For the small agribusiness, target costing is effective but for large companies like
Woolworth, this costing is not that relevant for the uncertain business environment. The
company Woolworth uses ABC costing as this is much effective in today’s competitive
world than the target costing (Klychova, et al., 2014).
The marketing strategy of Woolworth gets fails by adopting this costing if any error
occurs in the final vending price of the product as this costing is based on the
predictions. To attain the target cost the company Woolworth has to adopt the
technology that is cheaper which the biggest disadvantage is in an elongated way. So
target costing is not effective in the long run and for the large companies and it creates
an unrealistic burden on the company.
Even when the company Woolworth fails to sell all the produced quantity then it may
lead to the loss as per the target costing because there is the failure of proper
estimation of the quantity. The production department has to face many issues as in the
uncertain business environment the prices of the product fluctuate so to fix the cost is
very rigid. Target costing is done at the early stage of production as in the dynamic
environment the targets fluctuate at the later stages (Olagunju, et al., 2014).
The smooth functioning of the department gets hamper with the target costing so it does
not that much suitable in most cases. Woolworth Company also gives services to its
customers so target costing is difficult to apply in service industries as it requires a high
level of specialties and the paucity of information.
In the article, it was mentioned by the author that target costing gives a competitive
advantage but this process is time-consuming and by the time the targets are set the
business environment fluctuates and even this costing is not suitable for the long run so
Woolworth Company does not use this costing in today’s competitive environment.
Recommend for control purpose in company Woolworth
Based on the articles stated above, the contemporary organization should use the
Standard costing for the planning and the control purpose as this is much relevant than
the target costing. Standard costing has several benefits than the target costing in the
competitive world. This costing is much relevant for both the small and the bigger
organizations. Standard costing helps in controlling the cost of the company and helps
in planning useful information and taking the relevant decisions. Standard costing is an
easier inventory measurement tool and helps in reducing the production cost of the
company (Barbole, et al., 2013).
Standard costing is the managerial planning tool that helps in maximizing the profit of
the company so this costing method is used in the contemporary business so that an
efficient plan can be made by the management of the company (Alexandra, 2017). For
the budget preparation, this costing is very much effective as it helps in evaluating the
actual results by doing the comparison of the actual budget with the standard cost.
Standard costing aim is the cost reduction and controlling the cost so under the existing
business conditions the lowest cost with the affective quality can be maintained.

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The performance in the company can be measured through the standard costing so it is
recommended that the company should use this costing method so that if any essential
actions to be taken to control the cost then it can be taken through the periodic
comparisons (Hafez, et al., 2015). The cost variances can be developed through
standard costing as it develops the cost-conscious attitudes. Standard costing helps in
evaluating how much labor is required in the company, what services and facilities are
needed and how much material will be used in the company. so this detailed standards
helps in controlling the cost of the company and plan has been made as per the
requirements and the operation of the company.
Minimizing the cost is the main motive of the target costing. So target costing can also
be used by the contemporary business as it helps in acquiring the lower cost of the
product (Szychta and Dobroszek, 2016). The competitive advantage can be gain by the
target costing as it helps in bringing the innovation in the company. Target costing is the
desired cost of the company which focuses on the cost reduction technique and it is a
proactive technique in which products are designed.
Conclusion
From the above report, it is evaluated that standard and target costing both are efficient
in contemporary business as they help in planning and controlling the cost of the
company. In this report, the comparison of standard and target costing is stated and
from that, it is concluded that standard costing helps in doing the proper planning and
also helps in controlling the cost. It is the predetermined cost of the production process
which helps in controlling the cost of the company while the target costing is planned in
the advance to achieve the new product and it plans the cost related to the margins,
product cost, and price points.
From taking the two articles different opinion of the author is stated and it has been
analyzed that standard costing has several benefits than the target costing in the
competitive world although both are required in the company for the effective working
and smooth functioning of the company. Standard costing focuses on controlling the
cost of the company and planning the budgets whereas the target costing focuses on
the reduction of the cost and to gain a competitive advantage.

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References
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