Review the “Standard costs: Wake up and smell the coffee” article. When evaluating performance, many organizations compare current results with the actual results of previous accounting periods. Is an organization that follows this approach likely to encounter any problems? Explain.
Issues in Standard Costs and Budgeting
Standards are the expectations which are predetermined regarding the various inputs which are needed to achieve an anticipated result. These inputs are in the shape of factors of production of a manufacturing company and output is in the form of any product or service which is to be delivered to the customer. The standard costs show the measure of costs, which the factors of production should have. Standards are required for many reasons. These are needed for the business planning purpose, budgeting, process, CVP analysis and for the analysis of the various business facets of the business operations. Standards are also useful in billing and pricing. For the aim of evaluating performance, the actual results and standards are compared. Likewise, the comparison of the total actual costs with the standard costs shows the positive and negative variance of the performance as per the standards. However, this comparison provides little information that is useful for the identification of the specific problems which can aid in improvement (Wainwright & Wilson, 2012).
The economic crisis and the volatile prices in the past have promoted concern over the quality of the use of the standard costing system. It has been questioned if there can be a better way of measuring the performance of a company. The research conducted by KPMG yielded surprising results. The changes in the usage, frequency, methodology, and calculations of the standard costing method have revealed the methods which supported the business in economic crisis and the ones which were found lacking competence. The companies investigated in the research used standard costing and variance analysis for the valuation of inventory, for the reporting process for management and the measurement of performance purpose. The findings of the research showed the following results (Drury, 2013).
Standard costing is used wrongly sometimes for decision making. The limitations of this tool are often ignored, and the users treat it as a decision-making tool. Companies are now moving away from using it for pricing and coursing in global supply chain decisions because of its limitations. Another discrepancy which has been noticed is the limitation of the tool for comparisons while the inconsistent application of global methodologies locally. The best results were found for the companies who invested in the organization structure and governance for maintaining the right balance between the insight and efficiency. It was also yielded that the understanding of the key components of the product cost is vital. Generally, companies update their standard costs more frequently in times of economic volatility. It can be seen that the standard costing can be used for aspiration performance targeting purposes. However, care should be taken while comparing it with actual performance to ensure no inefficiencies are made. It is important to understand that effective performance management focuses more on the controllable costs. The variance analysis, costing efforts, and remediation efforts are to be focused regarding their controllable components of performance. The standard costing was also found to be difficult and effort-intensive to use as it is a very interactive process. The process of automating the standard costing globally has been found to be difficult to implement in companies. These companies are usually using spreadsheets for the handling of the standard costing. The ERP implementation has always been difficult for companies (Chartered Institute of Management Accountants, 2018).
To conclude, it has been evident that the standard costing is an important financial tool which is used for determining the dimensional profitability by product, by the customer, and by channel. However, it is needed to consider standard costing in a wider framework in which companies seek constant improvement and competitiveness.
References
Chartered Institute of Management Accountants. (2018). Standard costs: wake up and smell the coffee. Retrieved from http://www.cimaglobal.com/Pages-that-we-will-need-to-bring-back/Old-site-pages1/Old-site-pages/Thought-leadership/Newsletters/Insight-e-magazine/Insight-2010/Insight-March-2010/Standard-costing/
Drury, C. M. (2013). Management and Cost Accounting (3 ed.). Springer.
Wainwright, S., & Wilson, L. (2012) Chapter 7: Standard Costs and Variances. In Principles of Accounting: Volume II. Bridgepoint Education, Inc.
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