Standard Costing became increasingly widespread at the beginning of the 20th century as a system for determining the manufacturing unit cost of a product, by setting standard rates and required material quantities for various production processes (Hyer & Wemmerlöv, 2002). Drury (2008) state that "Product standard costs are derived by listing and adding the standard cost of operations required to produce a particular product." The popularity of this technique increased significantly in the manufacturing industry, mainly because it could be used as a mechanism for managing cost, which could then be used to set product prices.
Over the years, standard costing systems have become more than just cost control tools by helping managers in other decision-making areas, such as performance evaluation and profit measurement. However, towards the end of the 20th century, standard costing has been increasingly criticised as an inadequate management technique. Authors such as, Kaplan and Johnson (1987), Ferrara (1995) and Monden and Lee (1993) have argued that standard costing is inconsistent in today's extremely competitive and global business environment. They maintain that standard costing can produce certain types behaviour that could threaten the survival of modern businesses. Despite, the growing concerns regarding the application of standard costing in a rapidly changing economic environment, standard costing has remained a relatively common tool among business managers and is still regularly taught to students on various accounting and management courses.
This paper aims to critically analyse the use of standard costing as a control technique in a new era. Firstly, standard costing will be examined so as to understand its application in the business world. Secondly, arguments from various researchers will be presented, which support and criticized the use the standard costing. Finally, these arguments will be weighed, so as to draw conclusions as to whether standard costing is still relevant in this new international economic climate.
WHAT IS STANDARD COSTING AND HOW IS IT USED?
CIMA (2008) defines standard costing as a "control technique that reports variances by comparing actual costs to pre-set standards, so facilitating action through management by exception. The principle of 'management by exception' which applies to standard costing, allows managers to focus on issues relating to costs that deviate from the pre-set standards. Wood & Sangster (2005) note that actual costs that conform to the pre-set standard require little attention, instead management should focus on those actual costs that produce variances and fall significantly outside the standards.
Horngren et al (2002) show that finding the standard cost of a product or service basically requires two groups of calculations. According to Horngren et al, standard costing "traces (a) direct costs to output produced by multiplying the standard price or rates by the standard quantities of inputs allowed for actual outputs produced and (b) allocates indirect costs/[overheads] on the basis of the standard indirect rates times the standard quantities of the allocation bases allowed for the actual output produced." KMPG (2010) argues that under standard costing, indirect cost or overheads related to producing a single unit can be directly attributed to the product cost or included in the product cost by using an absorption technique.
The pre-set standards of standard costing give information regarding the cost of producing one unit of a particular good or service. According to CIMA (2008) "a standard cost is a carefully predetermined unit cost, which is prepared for each cost unit. It contains details of the standard amount and price of each resource that will be utilised in providing the service or manufacturing a product." Drury (2008) explains that standard costs can be determined by using historical/prior period data or by using...
CIMA (2008) _Management Accounting Performance Evaluation 4th ed.,_ London: Butterworth-Heinemann
Drury, C., (2008) _Management and Cost Accounting 7th ed.,_ London: Cengage Learning
Horngren, C. T., et al., (2002) _Cost Accounting: A Managerial Emphasis 11th ed.,_ New Jersey: Pearson Education
Jawaharlal (2002) _Cost Accounting 3rd ed.,_ India: Tata McGraw-Hill
_Accounting_, Massachusetts: Harvard Business School
Mott, G., (2008) _Accounting for Non-Accountants: A Manual for Managers and Students 7th ed.,_ London: Kogan Page Limited
Wood, F., & Sangster, A., (2005) _Frank Wood 's Business Accounting,_ New Jersey: Pearson Education
Cheatham C. B., & Cheatham L. R. (1996) "Redesigning Costing Systems: Is Standard Costing obsolete?" _Accounting Horizons,_ Vol. 10, 4, 23-31p
De Zoysa, A., & Herath, S
Ferrara, W. (1995), "Cost and Management Accounting: The 21st century paradigm", _Management Accounting_, 2, 30-6p
Lucas, M. (1997), "Standard Costing and its role in today Manufacturing Environment", _Management Accounting_, Vol. 75, 4, 32p
Monden, Y., & Lee, J
Sulaiman, M., Ahmad, N., et al. (2005) "Is Standard Costing Obsolete? : Empirical evidence from Malaysia", _Managerial Audit Journal,_ Vol. 20, 2, 109-124p
Accounting for Management (2010a) _Advantages and Disadvantages of Standard Costing and Variance Analysis [Online]_. New York
Accounting for Management (2010b) _Limitations of Activity Based Costing (ABC) systems [Online]_. New York
KPMG (2010) _Standard Costing [Online]._ London
Please join StudyMode to read the full document