Analysis of Standard Costing Applications: An Accounting Report

This report provides an overview of standard costing, a technique used to compare expected costs with actual costs to control and manage expenses. It discusses the advantages and disadvantages of this method, including its use in budgeting, inventory valuation, and cost control. The report analyzes two articles: one on standard costing in the pharmaceutical and chemical industries in Bangladesh and another on its implementation at SKF, a Swedish manufacturing company. The findings highlight the continued relevance of standard costing, its role in cost control, and the importance of variance analysis. The report examines the purposes of the articles, the techniques used, and the similarities and differences between the two case studies, offering insights into the practical application of standard costing in different contexts. The report also delves into the challenges encountered, such as the inability to use this technique in cost-plus contracts, the risk of inappropriate actions driven by variances, and the need for frequent updates to standard costs to reflect changing environments. Finally, it discusses various variances, including rate and volume variances, and their importance in analyzing cost deviations.

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Executive summary:
This report talks about the standard costing principles, the way in which the costing
principles have been applied and the way it has helped these companies.
The report talks about 2 Articles that have been chosen for review. The report talks about the
topic chosen in brief. It further lists down the purposes this research was undertaken, the
techniques that are useful for the companies involved and the discussion about the similarities
and the differences between the 2 and research findings about both of these.

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Contents
About the topic:..........................................................................................................................4
Explanation of the purposes of the Articles:..............................................................................7
Analysis of the findings:............................................................................................................8
Article 1: Standard costing Practise in Listed Pharmaceuticals and Chemical Industries in
Bangladesh:............................................................................................................................8
Article 2:...............................................................................................................................10
The Standard Costing System At SKF A Case Study Of A Swedish Manufacturing
Company:.............................................................................................................................10
Conclusion and outcomes/lessons learnt:.................................................................................12
References:...............................................................................................................................14

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About the topic:
The topic chosen here is standard costing.
This is the technique of costing wherein the expected cost for a product is compared as
against the actual costs that have been recorded and the variances if any, are recorded for
the purposes of controlling these costs and the apt actions are then undertaken so that the
future costs could be controlled. This is the approach which is further simplified and
which shows in the difference between the expected and the actual costs and also some
of the other alternatives include FIFO, LIFO methods. In this, a huge amount of
historical cost information has to be maintained for all of the stock items held in the
inventory. The technique includes the creation of some of the estimated or the standard
costs for a few of the activities that takes place inside the organisation. The main reason
for the same is the fact that there are a number of different applications which is too time
consuming to collect in the actual costs and hence, this technique is sued since it saves
time.
The standard costs are usually higher than the actual costs, these costs helps in the
calculation of the variable that would break in into difference and these are caused by the
factors such as the changes that takes place in the wage rates, the cost of the materials
etc. the cost accountant has the responsibility of changing these standard costs and bring
them in line with the actual costs that are being incurred.
The following are the advantages of this system:
 The majority of the companies fail to use this technique when it comes to the
calculation of the cost of the ending inventory which is quiet useful for the other

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companies. In numerous cases, the users are not even aware that they could in
fact use this technique (Accounting tools, 2018).
 A budget is always prepared using the standard costs. This mainly due to the
reason that it is somewhat not possible to be included in the actual costs of an
item on the day on which the budgets are made final. And mainly due to the
reason that the budget is always prepared so that the company could compare it
with the actual costs that have bene incurred in the financial reports through in
the budget period.
 It is one of the easiest things to print in to show in a report which shows the
period end inventory balances which is then multiplied in by the standard cost of
each one of the item and this helps in the generation of the valuation of the ending
inventory. This result does not always match up with the actual cost of the
inventory but is in fact very much closer. It is quiet easy for the actual costs to
change for the highest dollar of the components of the inventory on some frequent
basis and also leaves in the items which have a lower value for some of the
occasional cost reviews.
 The practise of aggregating in the actual costs into the cost pools is very big for
the purposes of allocating these costs to the inventory but then the same could be
done through the use of the overhead application rate and also adjust in the rate
once in every months so as to keep the actual costs closer.
 In case, the company makes the custom products, then these standard costs could
be used for the purposes of compiling in the projected costs of the different
requirements of the customers after which the margins could be added. This is
quite a complex system.

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Almost all of the companies does have budgets and they use the calculations using the
standard costs in order to quote for any specific customer received by them and lay down
the profit that they could earn in the near future. This would help them in assessing in the
actual performance as against the expected performance.
The following are the issues that are encountered with by following this technique:
 Cost plus contracts: this technique could not be used in case the contract is
valued at cost plus profit. Since then the actual costs are used.
 Inappropriate activities: the different and the numerous number of the variances
that have been reported in the standard costing system would drive in the
management for the purposes of taking the actions that are not correct for the
purposes of creating in the favourable variances. In order to illustrate, in case, the

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company buys the raw material in bulk so that they could get the same at
discounted prices, then though the company is saving in costs being incurred
towards the purchase of raw material but it is also blocking its investment in that
inventory. In the same way, if the management schedules in longer production
runs to reduce in the labour inefficiencies, then it would though decrease in the
labour inefficiency but increase labour rate (Accounting coach, 2018).
 Environment: this system does not consider the fact that the costs change with
the years or the day that pass by. And hence, the reliance on these standard for the
number of months or even a year before these costs are updated. But in the real
life, through the way of continuous improvement, the actual costs are being
reduced each by each reducing day and hence, there is a call for the up-dation of
these costs frequently (Lumen learning, 2018).
 Feedback: an important piece of the standard costing system is the fact that the
accounting staff completes in at the end of each of the reporting periods. In case,
the department of production concentrates on the immediate feedback for some
instant correction, then the reporting of these variances would be delayed which
would be bad for the management of the company.
 Information: the technique is used for the purposes of clouting in the variance at
the department level and hence, the inefficiency at an individual or at a unit level
cannot be determined.

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The following are the variances that pertains to the standard costs:
 Rate variance: this is the variance which is calculated by the difference between
the actual price that has been paid and the expected to the standard prices of that
thing multiplied by the actual quantity of that product that has been purchased.
 Volume variance: this is the variance which is calculated by the difference
between the actual quantity that has been sold and consumed and the budget
amount and which is multiplied by the standard price per unit (Accounting notes,
2018).
Therefore, in the nutshell, variance is either in the price that has been paid for it or is the
variance in the quantity that has been purchased.

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Explanation of the purposes of the Articles:
The main aim of the first article is to examine and illustrate in the scenario of this technique
in the listed pharmaceutical and chemical industry in Bangladesh. Another aim of this study
was to understand the reasons for which the old costing system is still being used in this
sector. The study talks about the reasons to why the old technique is still being used which is
the traditional costing method when the new technique has already been introduced such as
the ABC< Lean manufacturing, six sigma etc. then the importance of the various different
functions of standard costing have been investigated in this study.
In respect of the second article, there have been many of the tools such as activity based
costing, the balance scorecard and the target costing system that have gained some
importance in the business community. The traditional accounting technique prevails in
practise. The main aim of the second article is the examination of the use and the relevance of
the system of standard costing used at the Swedish manufacturing company SKF and also
provides in the ways through which the system could be improved. The study states the areas
wherein this technique could be improved.
Analysis of the findings:
Article 1: Toward Understanding the Complexities of Service Costing: A Review of
Theory and Practice (taken from Journal of Applied Management Accounting
Reserch):
This article talks about the Pharmaceutical and the chemical industry in the country of
Bangladesh which is one of the most important sectors in the economy. It counts for 97% of
the total requirements of the medicines and employs about 115,000 employees in them. There
are about 100 companies that produce various different chemicals in the country but the

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number of listed companies are only 28. This study focusses on those companies only. The
study found that about 75% of these companies were using the standard costing for various
different purposes. This shows the fact that even when there have been many changes and
even when a number of new methodologies and techniques have been introduced into the
system, even then the old techniques do not fail to appeal to these companies. And the main
reason behind the same is the fact that this old technique is simple when it comes to being
used. When inquired about the reason as to why the companies use the standard costing, all of
the companies mentioned that it controls costs and also helps in placing cost to the inventory.
It further helps in budgeting.
When asked about as to the types of standards that have been sent in by these companies,
they replied that they help in attaining the standards and also sets in the currents standard and
14% stated that they set in the ideal standard and only 10% sets in the basic standard.
Whether the company’s chose to use the design or the engineering studies, the companies
does favour in the historical usage of the stated method. When asked about the frequency of
reviewing these standards, there were many of the heterogeneous responses. About 28.725%
stated that these were reviewed on quarterly basis and about 23.81% of the people stated that
the changes in the economic as well as in the business conditions. About 14.28% of the
people review these standards on an annual basis and 9.52% of the people review in these
standards on a continuous basis and some of the reviews these twice in a year. The study
further states that the operating factors were the main factors that led to the emergence of the
variances. There were many of the random factors which include the poor recording of the
costs and the poor budgeting as being the reasons for the emergence of the variances. The
majority of these companies use the material price and the quantity variances along with the
variance of the sales volume and the price variances and then a very few use the variable and
the fixed manufacturing overhead. Then the smallest number of companies use the labour rate

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and the efficiency variances for their reporting. Then the material mix and the yield variance
is used by the minimum number of companies. The study states that the size of the variance is
the most apt factor when it comes to investigation of the variance.
Some of the companies stated that they often use the combination of the various factors along
with the various other practise which is not consistent. There are a number of disadvantages
of using this technique that often pose a question of its continuous adoption in the modern
manufacturing environments. The standards set in the managed often and very quickly
become outdated as the internal operating conditions and the external environmental changes
frequently. There is an increased amount of automotive operations, bypassing of the
continuous improvements accompanied with the lack of the detailed data that was also
reported in by these companies as being the major disadvantages of the standard based
costing.
In the nutshell, from the above it could be concluded that the new techniques such as the
Lean, six sigma has not appealed in to these companies in the industry of Chemical and
Pharmaceuticals in the country of Bangladesh. And it is due to this reason that these
companies are still going for the standard costing system (Elsie, 2013).
Article 2:
What kind of activity based information does your purpose require: International
Journal of Operations and Products management?
In this, the study is based on only 1 company which is the Swedish manufacturing company
SKF. It is the leading producer of ball bearings. The company uses the standard costing
system which is very much available each and every level of the entity. The company has
implemented many of the guidelines with relation to costs that have to be followed on timely

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basis. Many of the people are responsible for this system and hence have received signals
with regard to the guidelines that have not been used as was intended. There was a suspicion
that the information of the standard cost is somewhat not suitable and is not being following
correctly.
It is due to the following reasons that this technique is being used:
 Information: this is the information which is required in order to run in the company
successfully. The main aim of the technique is to provide in the financial information
to the managers so that the various activities could be planned, controlled for which
the company is responsible and also to see the financial impact of the stated decisions
that they could make. Thus technique helps in providing the cost data that could be
further used for many purposes. The author further argues in this study that the system
could be used for the purposes of setting up the budgets and also in the evaluation of
the performance of the managers, to persuade the non-performance of the activities
that have not been planned and hence, that would help in alerting the decision makers
to the ones that could be out of control and the same could be used in the situations
that would be out of control and that are in need of a remedial action. This technique
also helps in providing in the forecast of the future costs that are to be incurred for the
purposes of making the decisions, to understand the way in which the tracing of the
costs is done to the products and for the purposes of evaluating the inventory and also
to provide in the target that would motivate in the individuals.
 Setting up of the budgets and also evaluate the performance: the technique is very
much reliable and is very much convenient and could be easily used for the purposes
of budgeting. This is the data that could be converted into the schedule of the
budgeted production into the physical and the monetary requirements for the
materials, labour etc. As per the Dury, the budgets that are prepared using the targets

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that are achievable and also reliable are capable of being better than when the
standard costs are not available. These costs which are the standard costs are the ones
that have been identified using some careful studies of the material usage. And hence,
varies with time and volume. This technique also provides in a very strong basis for
the purposes of expecting the performance of the managers in the future. If the
company wants to measure performance, then the actual performance has to be
compared with a certain set of costs. The difference between the 2 would be termed as
variance and the management could then take initiatives to control these variances.
 Feedback control system: Hussey and Hussey during the year 1999 stated that one
of the main benefits of using this standard costing technique is that it acts as a control
device. It is very important to plan the results and to identify the important variances
that takes place. The variances are continuously monitored so that the same could be
controlled. He further states that the technique helps in monitoring in the results
achieved with the outcomes that were expected and then this could be followed by the
corrective actions that would entail.
 Decision making: for the purposes of making the decisions, figures and numbers are
required. This technique provides in the future costs that would be incurred which
serves as a very valuable source when it comes to making an informed decision. This
is in the sense that the management is duty bound to make the decisions which pertain
to the setting up of the prices of the products. If the management knows about the
price of any product, then that would help it in focussing on the most profitable
product mix and also in the analysing the product if it has the potential of making
losses.
 Inventory valuation: these are the costs that simplifies the task of tracing in the costs
to inventory. If this technique is not in place, then it would be necessary to maintain in

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the records of the actual costs for each one of the individual material stocks which
may but possible for the management of the company. When there is a sound standard
costing system, then that would not call for keeping of all of the records (Sofia, 1994).
Conclusion and outcomes/lessons learnt:
In the nutshell, this system of standard costing is very much helpful and it proves down its
superiority and usefulness. Though there are many of the disadvantages that it suffers from
but still the advantages or the benefits outlay the disadvantages.
Both of these Articles talk about the use of the standard costing system in their companies.
The following are the 4 lesson learnt in respect of the topic:
 It helps the management in tracing costs of each unit or the product
 It helps the management in making an informed decision
 It helps the management in evaluating the performance of the mangers
 It helps in controlling the costs since it compares in the costs are incurred against the
costs that should have bene incurred and then the appropriate corrective actions could
be undertaken timely so that these variances could be controlled in the future.
The outcomes that would be useful for the Australian companies are as follows:
 In the world of automation, the use of the standard cot system enhances efficiency of
the company’s business operations (Deltek, 2018).
 While the standard costing helps in the estimation of the inventory but there are many
of the inventory related issues that still needs to be addressed (Automation world,
2018).

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References:
AccountingCoach.com. (2018). What is standard costing? | AccountingCoach. [online]
Available at: https://www.accountingcoach.com/blog/what-is-standard-costing [Accessed 9
Sep. 2018].
Automationworld.com. (2018). Proper Use of Standard Cost Methods Enhances Efficiency |
Automation World. [online] Available at: https://www.automationworld.com/article/industry-
type/discrete-manufacturing/proper-use-standard-cost-methods-enhances-efficiency
[Accessed 9 Sep. 2018].
Bragg, S. and Bragg, S. (2018). Standard costing. [online] AccountingTools. Available at:
https://www.accountingtools.com/articles/2017/5/14/standard-costing [Accessed 9 Sep.
2018].
Courses.lumenlearning.com. (2018). 8.4 Advantages and Disadvantages of Standard Costing
| Managerial Accounting. [online] Available at: https://courses.lumenlearning.com/sac-
managacct/chapter/advantages-and-disadvantages-of-standard-costing/ [Accessed 9 Sep.
2018].
Deltek.com. (2018). Standard Costing and Variance Analysis. [online] Available at:
https://www.deltek.com/en/learn/blogs/government-contracting/2018/03/standard-costing-
and-variance-analysis [Accessed 9 Sep. 2018].
Learn Accounting: Notes, Procedures, Problems and Solutions. (2018). Standard Costing:
Meaning and Objectives | Cost Accounting. [online] Available at:
http://www.accountingnotes.net/cost-accounting/standard-costing/standard-costing-meaning-
and-objectives-cost-accounting/10576 [Accessed 9 Sep. 2018].

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Borjesson, s. (1994). What kind of activity-based information does your purpose require?.
[online] www.proquest.com. Available at:
https://search.proquest.com/business/docview/232332545/C61F6FE5790F4964PQ/1?
accountid=30552 [Accessed 12 Sep. 2018].
Elsie, c. (2013). Toward Understanding the Complexities of Service Costing: A Review of
Theory and Practice. [online] www.proquest.com. Available at:
https://search.proquest.com/docview/1470778539/14259997268748C0PQ/1?
accountid=30552 [Accessed 12 Sep. 2018].