Management Accounting II: Cost Control through Standard Costing Report

This report, focusing on Management Accounting II, delves into standard costing and variance analysis, crucial tools for cost control and performance evaluation. The report begins with definitions of standard costs, their various types, and the process of their preparation. It then explores the meaning and conduct of variance analysis. The second task highlights the importance of standard costing and variance analysis in enhancing efficiency, budgetary control, and decision-making. The third task examines the practical uses of standard costing and variance analysis in controlling costs within an organization, providing a framework for cost reduction and performance improvement. The report concludes by discussing the limitations of these methods. The report uses Khind Holdings Berhad as a case study to illustrate these concepts, providing real-world applications of the discussed topics. The content provides a comprehensive overview of how standard costing and variance analysis can be used to improve business operations.

MANAGEMENT
ACCOUNTING II

Table of Contents
TASK 1............................................................................................................................................1
Definition of standard costs:........................................................................................................1
Various types of standard costs:..................................................................................................1
Preparation of standard costs: .....................................................................................................2
Meaning of variance analysis:.....................................................................................................2
Conduct of Variance analysis:.....................................................................................................2
TASK 2............................................................................................................................................3
Importance of Standard costing:..................................................................................................3
Importance of variance analysis: ................................................................................................4
TASK 3 ......................................................................................................................................5
Uses of standard costing for control the cost: .............................................................................5
Uses of variance analysis to control the cost: ............................................................................5
TASK 4 ..........................................................................................................................................6
Limitations of using Standard costing and variance analysis:.....................................................6
SUMMARY.....................................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
In any business environment, management accounting plays a an important role in
functioning of business operations. This follows many aspects of accounting such as capital
budgeting, trends, forecasting, valuation, standard costing and so on. These aspects of
management accounting helps the company in achieving its goals and objectives. A company
named Khind Holdings Berhad (KHB) is chosen for better understanding of management
accounting concept which is engaged in manufacturing the home consumer electrical appliances
and industrial electrical products. This report is divided into four task, first task explains the term
standard costs and its types. Second task describes the importance of standard costing and
variance analysis whereas third task defines the uses of standard costing to control the cost.
Fourth task defines about limitations of standard costing and variance analysis.
TASK 1
Definition of standard costs:
Standard cost is an estimated cost of material, labour and other cost which is used in
manufacturing of a product and later, this estimated cost is compared with actual cost of
production. Estimation of cost is based on some standard criteria (Standard cost, 2016). Standard
cost assist the company like Khind Holdings Berhad in reducing its actual cost by improving
efficiency of its working staff (Kaplan and Atkinson, 2015).
Various types of standard costs:
There are various types of standard costs which are as follows:
 Basic Standards cost: These cost are prepared for long term point of view which remain
unchanged in normal condition. The main purpose of setting this cost is to provide trend
and to used as a background for statistical analysis over the time and , due to this it can
not form part of reporting system.
 Ideal standard costs: These standards are set by the Khind Holdings Berhad which can be
achieved under most favourable conditions. Due to this, standard cost does not allow the
any normal production issue such as material spoilage, stoppages, idle time and so on.
 Attainable standard costs: These costs are used for product costing, pricing for stock
valuation and budgeting purposes, consequently, it form part of reporting system. By
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using this standard costs, Khind Holdings Berhad can control its cost and evaluate its
performance.
 Current standard costs: These are set by the company for short period of time, it can be
set up to 3 months or can be for monthly cost control and evaluation (Ward, 2012).
Preparation of standard costs:
For preparation of any type of standard costs, there is need to identify and evaluate the all
necessary requirements. For example, first step in developing material standard cost is to identify
all specific materials used to produce the product. Thereafter, set the quality and quantity of
such material that Khind Holdings Berhad wants to sustain and in last stage, estimate the costs of
these materials in best possible manner considering the normal wastage in production process,
efficiency and effective level of its working staff. For example, in calculating the material cost
variances of material X(suppose), there shall need to have standard price per unit material X and
standard quantity of such material to compare with the actual figures.
Meaning of variance analysis:
Variance is the difference between expected amount and an actual amount in costing
context in a business environment. Variance can also be called as deviation of actual costs from
standard costs.
Variance analysis is normally related with manufacturer's product costs, it is an attempt
to investigates and evaluates the reasons or causes of differences between standard costs of input
material and actual cost of that input material in production process. The main objective of
variance analysis is to apply cost control and cost reduction in an organisation like Khind
Holdings Berhad.
Conduct of Variance analysis:
Performance of variance analysis is necessary for implementing corrective action plan.
Variance analysis can be performed by doing following steps:
 Plan variance analysis: Firstly, determine which metrics company want to compare.
Thereafter, there is a requirement to plan the workings (DRURY, 2013).
 Set the materiality threshold: In this step, Khind Holdings Berhad shall require to set a
limit of materiality level. A difference between actual cost an standard costs which is up
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to the threshold limit shall be ignored. Consequently, such amount shall not be
considered in performing the variance analysis.
 Cause analysis: In this step, company like Khind Holdings Berhad shall require to
analysis and evaluate the causes or reasons of variance happening which is identified in
first step (Parker, 2012).
TASK 2
Importance of Standard costing:
An company like Khind Holdings Berhad shall need to implement standard costing in its
production system to maintain the cost control and performance evaluation. Standard costing
assist company in finding out various individual variances such as material cost variances, labour
cost variances, fixed cost variances and so on. Some of the importance of implementing standard
costing are as follows:
 Increase in efficiency: By fixing the standard cost of direct material, labour and
overheads by account manager, Khind Holdings Berhad can increase the efficiency of
production. This can be achieved through comparing the standard cost with actual cost
and consequently, manager will succeed to increase the efficiency of workers by
reducing cost. Increase in efficiency is beneficial for improving the market share which
result in achieving higher profits. Therefore, it may be said that for increasing the
market share and profits of the company, standard costing is pre-requite requirement.
 Use in budgetary control: Standard costing is also used in budgetary system, because, in
preparing budgets, amounts of budget is calculated by application of standard costing
and also assist in taking relative actions of improvement. Budgetary control is required
in taking better decision making in respect of amount of various budgets. For
preparation of a good budget for controlling the business activities, there is requirement
to use the standard costing. Therefore, it can be said that for preparing an effective
budgetary control, there is a pre requisite of standard costing system.
 Proper decisions: It is also helpful for taking proper decisions in costs perspective. In an
organisation, there are large number of alternatives regarding expenses, due to this,
standard costing helps Khind Holdings Berhad in selecting the best alternative from
different expenses. Standard costing act as a support system of the management staff in
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taking best decisions related to various situation which can not be effectively solve out
in the absence of standard costing. Therefore, it can be said that standard costing acts as
taking proper decisions. For example, the above respected company apply this concept
for better results.
 Assist in management functions: In an organisation, it serves as a guide to the
management in several management functions while formulating prices and production
policies etc. Because standard costs are determined before the actual cost occurred , it
can help the management to in doing its function effectively. For example, a company
may apply such system for its inventory and working staff which results in optimum
utilisation of inventory and increase in its worker's efficiency (Wickramasinghe and
Alawattage, 2012).
Importance of variance analysis:
Variance analysis deals with evaluating the deviations in budgeted and actual financial
performance of a company and helps the Khind Holdings Berhad in identifying the weakness of
the production systems. Some of importance of variance analysis are as follows:
 Assist in taking appropriate action: A variance analysis assist the Khind Holdings Berhad
in finding reasons for overall variances. This help the company in taking appropriate
remedial actions in the interest of future of company in reducing cost and improving the
employees efficiency. For example, a material cost variance analysis can increase the
effectiveness of a business organisation in functioning of task related to inventory such
reduce in purchasing the cost, optimum quantity utilisation.
 Cost reduction: In an manufacturing company like Khind Holdings Berhad, cost
reduction of production system is the ultimate goal. This goal can be achieved by
applying variance analysis process in production system. Variance analysis helps the
company in cost control and reduction by identifying reasons for such variances. For
example, by doing various labour related variance analysis like labour rate variance,
labour efficiency variance etc. may assist the organisation in better functioning of labour
related tasks.
 Highlights inefficient performances: Variance analysis helps the company like Khind
Holdings Berhad in highlighting the inefficient and ineffective performance and also
provides the way for improving such things in business environment of a manufacturing
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company. For example, by calculating various variances like fixed overhead expenditure
variance, variable overhead efficiency variance etc., company can improve its
functioning of operations by detecting inefficient performances.
 Assist in fixing individual responsibility: By applying the variance analysis, a company
can fix the responsibility of the individual person who is responsible for a particular
variance. For example, if there is material efficiency variance which is unfavourable, then
production manger is responsible for this and accordingly, such individual shall be
penalised for doing ineffective work. For example, by calculating the material price
variance company can fix the responsibility of its purchase manager. (Hilton, and Platt,
2013).
TASK 3
Uses of standard costing for control the cost:
Standard costing can be utilised in an organisation like Khind Holdings Berhad as a
management tool which assist the such company in making correct predilections and provides a
better framework. Some of the uses of standard costing in a company are as follows:
 It can be used as guidance tools which assist in price formulation and making policies
regarding production system. For example, inventory pricing, profit planning and product
pricing etc.
 it may be used as a stable and sound basis for assisting in comparison of actual costs with
standard costs and thereafter providing the remedial action to the company.
 Standard costing may be used as an atmosphere of cost consciousness among various
office and managerial staff and workmen staff. By using this, a company may provides
incentives to the to working staff for better performance form standards.
 It assist the company in preparing more accurate and effective budget for the future
period.
 Due to application of standard costing, the principle of 'management by exception' can be
applied with ease and more efficiently, due to this cost reduction and cost control can be
achieved (Otley, 2016).
 A company may use standard costing system in conjunction with the standard costing
system which results in better cost control.
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Uses of variance analysis to control the cost:
Variance analysis is used by the company like Khind Holdings Berhad for cost control of
such organisation. There are many ways through which variance analysis may be used in an
organisation for cost control and cost reduction. Some of the uses of variance analysis process
are as follows:
 Variance analysis calculates the difference between an incurred cost and an expected
which assist in cost control. For example, by calculating the material price variance
which help the company to find whether company purchase its raw material at higher
cost or not.
 By applying this, company can find the reasons for investigate the reasons for
deviation such as labour efficiency variance is useful for identification of working staff
irregularities.
 Variance analysis report the variances to the management, consequently, management
can take corrective action for reduce the cost.
 It take corrective action to bring the actual cost near to estimated cost.
 Variance analysis may be used to find the inefficiency an ineffectiveness in the
production department as well as other department of overhead cost.
 This process may be applied in selling department by comparing the estimated (target)
sales amount with actual sales.
 This can be used to find the deviation between estimated fixed overhead cost and
actual fixed cost incurred in production system.
 Variance analysis may also be used for comparing the estimated variable cost and
actual variable cost incurred. For example, in calculating the various variances related
to material cost, labour cost and variable overhead, there is requirement to compare the
budged (standard) amount with actual figures (Fullerton, Kennedy and Widener,
2014).
TASK 4
Limitations of using Standard costing and variance analysis:
There are some weakness in implementing the standard costing system and variance
analysis. Some of such limitations are stated below:
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Standard costing:
Limitations of using Standard costing and variance analysis:
There are some weakness in implementing the standard costing system and variance
analysis. Some of such limitations are stated below:
Standard costing:
 Stock keeping issues: It results in lack of inventory count by not preparing stock sheets
for purchase and sale of products. Khind Holding Berhad company does not order stock
before lead time which further affect in lack of inventory from the warehouse (Otley and
Emmanuel, 2013). Due to this issue process of cost controlling can be get affected as it
will misguide the managers because they will not have any exact information of cost of
inventory.
 More expenses: Standard costing results in more expenses which affect cost controlling
process because when organisation faces high level of expenses then it is not possible to
control the costs.
 Time consuming process: Standard costing is a time consuming process in which
managers have to spend their time in arranging figures in appropriate manner. Due to this
issue cost controlling process get affected because there is no time left to conduct this
procedure properly as most of the time is invested on standard costing.
 Unattainable standards: Standard of products are set too high between suppliers which
makes it impossible to achieve them. KHB being an international electronic
manufacturing company has fixed price of their equipment at a high level with it's
competitors (Soin and Collier, 2013). It can leave impact upon cost controlling process
because standards remains unattainable then it is not possible to conduct any activities in
appropriate manner.
Variance analysis:
 Based on financial results: Variance analysis is mainly based upon financial results which
are released after a long period and due to this time gap ability of taking appropriate
actions to enhance the performance. It will affect the process of cost controlling by
creating issues related to identification of costs.
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 Poor maintenance: Variance analysis results in poor maintenance of costs which creates
issues for the process of cost controlling as due to this limitation managers will not be
able to analyse all the costs.
 Behavioural issues: Variance analysis can result in short termism due to its inherent
tendency toward short term and quantified objectives and results. It can also affect the
process of cost controlling because when quantified outcomes will not be analysed then it
can affect the whole process.
 Can create fake results: If variance analysis is not taken in to consideration while
conducting budgeting related activities then it can affect the whole process of cost
controlling because due to this appropriate decisions could not be taken. This situation
may take place because of fake results which have resulted by not taking variance
analysis in to consideration (Renz, 2016).
SUMMARY
Summary of this report is categorised in following points:
 There are various types of standard costs which a company may choose while adopting
the standard costing system.
 There is huge benefits to the Khind Holdings Berhad, in case of implementing the
standard cost system such as assist in cost reduction, assigning the individual person's
responsibility.
 Standard cost and variance analysis may be used conducting comparison between
estimated cost and actual cost of overhead.
 There are some limitations for using the standard costing and variance analysis such as it
may be chances to have fake results by applying these in case of wrong predication of
standards.
CONCLUSION
From the above report it is concluded that standard costing is most important part of
costing which gives power to a manufacturing company for reducing and controlling the cost of
production system. There is better profitability in future to company like Khind Holdings
Berhad, if it implement the standard costing and variance analysis process. It is further concluded
that there is major difference in term standard cost and standard costing. A company can use its
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standard costing system in conjunction with budgetary control for improving its business
operations. It is further concluded that apart from importance and advantages from implementing
standard costing, there are also some limitations of using such system. As a result, company shall
need to take such things in consideration while implementing the standard costing system.
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