Overview of Standard Costing in Business Organizations

Managerial accounting is the method of identifying, gauging, evaluating, interpreting and communicating information to the business managers for meeting the goals of the organisations (Chenhall and Moers 2015). For this report, standard costing is chosen, which is deemed to be one of the significant aspects of managerial accounting. The first section would provide a brief overview of the standard costing in the context of the business organisations. Secondly, two research articles would be chosen that would assist in exploring the various aspects associated with standard costing. Thirdly, the paper would seek to find out the common features and dissimilarities between the two research articles. The last segment of the report would emphasise on finding out four features that might prove to be advantageous for the accountants working in the Australian organisations.

As stated by Armitage, Webb and Glynn (2016), standard costing is an accounting method, which few manufacturers utilise for identifying the variations between the actual costs of products manufactured and the costs, which might have incurred for the products. More specifically, integration of standard costing is made with the budgets of the manufacturers for an accounting period. It is developed from the evaluation of the value related to cost elements along with associating technical requirements and the qualifications pertaining to labour, materials and other costs to the usage rates and prices expected to be applied during the period where standard costing would be used. Thus, with the help of standard costing, the management of an organisation could undertake corrective decisions like price fixation and make-or-buy decisions that would be valuable for the organisation (Bromwich and Scapens 2016).

Standard costing takes into account the fixation of pre-determined estimates of cost for providing a basis to compare with the actual costs. Any predetermined or projected cost of carrying out any operation or manufacturing a product or service under normal situations could be termed as standard cost. This approach is accepted globally in the form of an effective instrument in relation to cost control in industrial sectors (Cleary 2015). Even though standard costs and budgeted costs are used sometimes interchangeably, budgeted costs imply the overall planned costs for various products. Generally, the system of budgetary control is controlled by standard costing due to relationship between them; however, they are not dependent on each other.

By using standard costing, an organisation accomplishes its objective systematically coupled with effective planning. Direct costing, absorption costing, process costing and job costing are the approaches, in which standard costing could be applied (Cuzdriorean 2017). Therefore, it is inherent that standard costing is not a costing method; instead, it could be adjusted to any method. Based on the above discussion, it is noteworthy to list down the different objectives of the standard costing technique and they are enumerated briefly as follows:

• To supply a formal basis in order to analyse efficacy and performance
• To ensure cost control by formulating standards and assessment of variances (Farkas, Kersting and Stephens 2016)
• To assure that the “management by exception” principle is practiced at the detailed and operational levels of the business organisations
• To aid the managers in developing budgets
• To help in allocating responsibility in relation to non-standard performance for rectifying loopholes or capitalising on advantages
• To ensure that the employees and the management are motivated for achieving the set targets
• To offer a basis through which it is possible to make estimations
• To offer guidance on the probable ways through performance could be improved

Selected Research Articles for Exploring Various Aspects of Standard Costing

In order to evaluate the use of standard costing in the business organisations, two journal articles have been selected for fitting the purpose of this section. The two articles include the following:

Article 1: “Effects of Standard Costing on the Profitability of Telecommunication Companies: Study of MTN Nigeria”

Article 2: “Implications of Standard Costing System in Manufacturing: A Case Study”

The brief explanation of these two studies for the exploration of standard costing is demonstrated briefly as follows:

Article 1:

This article is intended to examine the effect of standard costing on the telecommunication firms of MTN for ascertaining whether standard costing system would have impact on the profitability levels. In the words of Abdullahj et al. (2015), the purpose of the article is to find out the relationship between standard costing system and profit level of the firms and in ascertaining whether these firms have implemented the standard costing system. The researchers have further stated that standard costing is a method of performance appraisal, which is utilised by contrasting actual performance with the standards for all operational areas within the organisation. This is conducted in discussion with the different heads of the organisational segments. At the time the actual performance occurs, it is compared with the standards and when any difference is found, it is evaluated for identifying the reasons behind its occurrence.

This article focuses on MTN Nigeria, which is the biggest member of a South African organisation, MTN Group having a number of global subsidiaries. The vision of the organisation in Nigeria is to become the leading service provider in telecommunication sector and its vision is to deliver the most effective network quality, customer value and service. It has been identified that profit is critical to ensure the success of any business organisation and the telecommunication industry is one of the fastest growing sectors in the world (Dekker 2016).

In order to ensure such growth pattern, it is necessary for the organisations operating in the telecommunication sector to invest in infrastructure, equipment, software and logistics for providing quality services to the customers. The consumer sophistication, rising technological progress and globalisation has left these organisations with a handful of alternatives than to make investments in the above-stated items (Cooper 2017). Even though these investments might not lead to immediate gains for the telecommunication service providers, they need to continue with the same for sustaining in cutthroat competition. Due to this, the managers working in these organisations are confronted with issues regarding cost minimisation so that the overall revenues and profits could be maximised. Some of the significant issues include procurement of the state-of-the-art equipment like raising switching of assets, roaming, transmission and others, concentration on programs yielding greater revenues like marketing services, promotions, coming up with innovative solutions, debt management and cost reduction.

Common Features and Dissimilarities Between the Research Articles

By taking into consideration, the telecommunications sector of Nigeria, the paper is intended to find out the ways through which these issues are managed and the way profit level is influenced by the balance of the levels of different types of assets and liabilities. In addition, the research aimed at finding out the trends in profitability in the sector over the users for informing decision making by policy makers and investors. By taking into account all these aspects, these research questions are formulated for gaining an insight of the topic:

• How is the Nigerian telecommunications sector performing in terms of profitability trend?
• How standard costing affect the profit level of MTN Nigeria?
• How could the profitability of the firms operating in the sector be improved?

This article is focused on discussing the implications of standard costing system in the manufacturing organisations based on a case study. The case study is involved with addressing a particular scenario. According to the case study, there has been significant decline in sales revenue of ASL between 1^st March 2014 and 28^th February 2015 due to the failure of standard costing system in addressing the business needs, as stated by the Operations Manager of the organisation. Even though the system assisted in standardising the production processes resulting in cost savings, it has thwarted steady improvement as well as servicing the demands of the individual customers. As a result, it has lead to loss of sales revenue for ASL. In order to address the viewpoint of the manager, the Chief Financial Officer (CFO) of the organisation has asked to provide a critical analysis of the drawbacks and merits of the standard costing system. Therefore, in order to provide the feedback to the CFO, a detailed description of the standard costing system has been included in this article.

According to the researcher, Eisenberg (2016), the standard costs for staffs, materials and other expenses are formulated depending on management estimates of prices, labour usage and materials along with budgeted production volume and overhead costs. This is because the utilisation of these standards could be carried out with valuation of inventory and actual costs (Fullerton, Kennedy and Widener 2014). After this, the paper has explored the merits and loopholes in the standard costing system and the techniques through which standard costing assists in addressing various business needs. The most significant business needs take into consideration continuous improvement, responses to the individual customer requirements, individuality and customer service, growth in sales and cost minimisation (Kotas 2014). Finally, appropriate recommendations have been provided so that the identified issues could be resolved in ASL by keeping in mind the concerns raised by the Operations Manager of the organisation. By considering all the aspects, the following research questions are formulated in order to explore the topic:

• Is standard costing system not able to provide services for catering to the individual needs of the customers?
• Will the sales revenue of ASL be affected due to adoption of standard costing system?
• What benefits and limitations does standard costing system have on the organisations?
• How the overall sales revenue for ASL could be increased? 

Advantages of Standard Costing for Australian Organizations

The two chosen articles are deemed to have certain features and points in common, which are demonstrated briefly as follows:

In both the articles, a detailed description of the standard costing system has been provided. The researchers of both the articles have stated that the variances obtained by using the standard costing system could be assessed performance evaluation, reasons for cost control and pricing. In this context, it needs to be mentioned that standard costing covers a significant part of the techniques of managerial accounting that take into consideration responsibility accounting statement as well as budgeting system (Langfield-Smith et al. 2017).

In both the articles, the researchers have provided a clear description of the advantages and loopholes inherent in standard costing system. Some of the common merits mentioned in both the articles include the following:

• Standard costing system is used as the benchmark where the actual costs are contrasted with the standard costs. This implies that the system already sets the volume to be produced and the estimated activity levels, which would then be compared with the actual performance (Lasyoud, Haslam and Roslender 2018).
• It is possible to change the suppliers and there could be introduction of enhanced processes and materials for accomplishing cost objectives.

The similar drawbacks that could be identified from both the research papers constitute of the following:

• In this system, it is not possible to control some costs or they could be extremely high for achievement. Therefore, the employees might not feel motivated, if the management holds them to be responsible for unfavourable variances (Maskell, Baggaley and Grasso 2016).
• Standard costing system often results in administrative inconvenience to the managers due to inaccurate estimation of price recording and normal loss.

However, it has been identified that these two articles have certain aspects that are different from each other and these are listed down as follows:

• Even though both the articles have focused on one particular organisation each, the two organisations do not belong to the same sector. For the first article, the standard costing has been used in the context of MTN, which is a service organisation providing telecommunication services to its customers in Nigeria. In case of the second article, emphasis has been placed on ASL, which is a manufacturing organisation providing different types of products to its customers. Therefore, the difference that is evident is the application of the standard costing system in manufacturing and service sector.
• As per the overview of Abdullahj et al. (2015),it is possible segregate standard costing into different types. These types primarily take into account attainable standard, ideal standard, basic standard, existing standard, material standard and labour standard. The ideal standard is designed particularly based on the maximum productive capability of the organisation. The attainable standard reflects a developed standard designed to be considered practicable within the company (McLean, McGovern and Davie 2015). The current standard implies the current working conditions within the firms or the entire industry. Basic standard is a standard developed in the past designed for accomplishing a particular objective. The material standard is based on engineering and technical specifications and the labour standard depicts the exact grades of labour to be utilised (McVay, Kennedy and Fullerton 2016). In the second article, no evidences could be found regarding the types of standard costing.
• In accordance with the opinion of Abdullahj et al. (2015),the intention was to find out the ways of using standard costing system through which the MTN telecommunication firms control cost and the techniques of enhancing cost control. However, according to the research work of Eisenberg (2016), it has been identified that the Operations Manager of ASL believes that the organisation is suffering from loss of sales revenue due to standard costing system. Hence, the question here is to analyse whether standard costing practices need to be eliminated from the organisation or whether it needs to be supplemented by some other analyses to be followed for ensuring the betterment of the organisation.

The two articles provide relevant outcomes that might prove to be useful for the management accountants working in Australia and they are explained briefly as follows:

  It has been identified that MTN could obtain increased cost control, if it sets standards for all the costs incurred and after this; the variances or exceptions could be highlighted in case of instances where there are differences between the planned scenario and the actual scenario. The variances provide a starting base in order to judge the efficacy of managers to control the costs for which they are accountable (Miller-Nobles, Mattison and Matsumura 2016). For instance, in the production centre of MTN, it is assumed that the actual material cost of $52,015 have gone beyond the standard costs by $6,015. It is useful for the management accountants to know that the material costs have exceed by $6,015, instead of knowing that the actual material cost amounted to $52,015.

Based on this information, the managers could examine the reasons behind the excess of actual cost over standard cost and accordingly, actions could be undertaken for rectifying the same (Nørreklit, Raffnsøe-Møller and Mitchell 2016). Additional investigations would disclose whether the variance occurred due to ineffective material usage or higher prices because of inflation or ineffective purchase. In either case, standard costing system provides early signal by shedding light on the potential hazard for assisting the management of the organisation.

According to Abdullahj et al. (2015), if the practices and principles of the standard costing system are adopted and they are practiced in MTN Nigeria, it would act as a tool in order to enhance the overall profit level. This necessitates the need for managerial planning as well as decision-making. Thus, the management needs to formulate effective cost standards along with controlling service costs so that the standard costs become identical with the future actual costs (Nuhu, Baird and Bala Appuhamilage 2017). It would assist the management accountants in formulating more accurate budgets and in projecting costs to bid on jobs.

From the second article of Eisenberg (2016), two significant outcomes chosen to be valuable for the management accountants of the Australian organisations include the following:

The actual cost system measures inventories in a complicated manner, which could be overcome with the help of standard costing system. In case of actual cost system, the unit costs for groups of similar products might not be identical with each other (Parker and Fleischman 2017). For instance, difference could take place due to machine malfunction, which might increase labour and overhead expenses. In standard costing method, these costs would not be taken into consideration in inventory. Instead, such costs would be charged to variance accounts after the contrast between standard costs and actual costs (Pickering and Byrnes 2016).

With the help of standard costing system, it is possible to minimise the costs of production. When the standard costs are used, they would increase the cost consciousness of the employees along with seeking enhanced methods of task completion (Sunarni 2015). If the employees are active in minimising costs, it becomes possible for the business organisations to control cost.

Conclusion:

From the above discussion, it is evident that standard costing system is a significant tool of managerial accounting, which assists the managers of the business organisations in minimising cost and identifying variances with the actual cost so that corrective actions could be undertaken. The two articles selected reveal the same scenario, as this costing system proves to be valuable in enhancing the profitability of the organisations. With the help of standard costing system, it is possible to minimise the costs of production. When the standard costs are used, they would increase the cost consciousness of the employees along with seeking enhanced methods of task completion. Thus, the use of standard costing system in all types of business organisations plays a significant role in enhancing their overall profitability.

References:

Abdullahj, S.R., Oni, I., Ahmed, M.D. and Shakur, F.I., 2015. Effects of Standard Costing on the Profitability of Telecommunication Companies: Study of MTN Nigeria. Oman Chapter of Arabian Journal of Business and Management Review, 5(1), pp.1-8.

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