Tag: Costing

  • Standard Costing Accounting PDF Essay

    Standard Costing Accounting PDF Essay

    Standard Costing Accounting Essay with PDF; They stand a specialized expenditure technique in which standard costs stand predetermined, actual costs stand compared with these predetermined costs; and, the differences between the two stand monitored and analyzed according to their factors; to take corrective action to control the factors that lead to adverse differences. The standard calculation system, therefore, includes various steps – from setting standards to the definitive application of cost control.

    Here are the articles to explain, What is Standard Costing Accounting? Its Definition, Advantages, and Disadvantages!

    It refers to the determination or pre-quantification of the cost of a product, process, or operation under standard business conditions. It serves as an effective tool in the hands of management for planning, coordinating, and controlling various business activities. The business is undergoing a continuous process of growth; which stands carried out using the standard cost technique; because the standard costs stand set realistically, achievable, and change from time to time according to needs and requirements.

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    Definition of Standard Costing;

    According to the Chartered Institute of Management Accountants, London, Standard Costing accounting is “the preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence”. The definition given by W.W Bigg makes the concept of standard costing more clear. According to him, “Standard Costing discloses the costs of deviations from the standard and classifies these as to their causes, so that management is immediately informed of the sphere of operations in which remedial action is necessary.”

    According to J. Batty,

    “Standard costing is a system of cost accounting which is designed to show in detail how much each product should cost to produce and sell when a business is operating at a stated level of efficiency and for a given volume of output”.

    Advantages of Standard Costing;

    Standard costing accounting technique as a management tool is an aid in making predictions and providing Standards for measuring business performance. It helps the management in the following ways:

    Formulation of Pricing and Production Policies;

    Standard Costing helps the management to formulate pricing and production policies based on estimated costs to incur. Estimated production and its cost provide the base for pricing policy and profit planning.

    Facilitates Delegation of Authority;

    With standard costing, the Delegation of Authority can stand successfully implemented as top managers can delegate responsibility according to the standards fixed.

    Facilitation of Principle of Management by Exception;

    The standard Cost System works based on the principle of management by exception. Management needs to give concentration only on those areas where deviations occur, i.e., Actual performance is more or less than standards.

    The yardstick for Comparison;

    Standard Costing gives a suitable base for comparison of actual performance with predetermined standards. Standards can stand fixed for any element of cost e.g., material, labor, overheads, etc.

    Optimum Use of Resources;

    Standard Cost also helps in optimum use of resources. Different resources like raw material, plant and machinery, and current assets stand used according to the standards fixed in advance.

    Uniform Valuation of Stock;

    Under Standard Cost System, the valuation of the stock stands done at standard cost. The variance account stands open for transferring the deviations between standards and actual performance. This brings uniformity to the valuation of the stock.

    Facilitate Coordination;

    When standards stand fixed, the performance of various departments e.g., production, sales, purchase, etc., consider. In this way, standard costing enables coordination among all departments.

    Effective Cost Control;

    Standard Costing is an effective tool in controlling cost because actual performance stands compared with standards and in case of deviations, corrective action stands taken.

    Economy;

    In standard costing, standards stand fixed in advance. Once standards stand fixed development of cost, most of the clerical work reduce. Thus it is an economical method of costing and brings efficiency to production.

    Motivates Employees;

    When standards exist fixed Incentive schemes to motivate employees can introduce. Employees try to achieve the standards and they remain different monetary and non-monetary incentives.

    Disadvantages or limitations of Standard Costing;

    Some of the basic limitations of Standard costing accounting stand discussed below:

    Difficulty in Fixing Standards;

    Standards are difficult to set. If inaccurate standards stand set, they can do more harm than good to the business. Tight standards act as a disincentive to work and loose ones don’t provide any incentive at all. If due care stands taken and caution stands exercised based on scientific studies, correct standards may stand set. It is not that difficult. However, expert knowledge and skill stand required for fixing standards.

    Estimation of Price Difficult;

    Precise estimation of likely prices of material or rates of labor poses a problem. However, the use of sophisticated forecasting techniques can assist to a great extent.

    Apprehension of Output Change;

    Its actual output varies, and standard costs can’t realize. Again scientific techniques and market research largely solve the problem.

    Out-Dated Standards;

    Standards may become out of date very soon. Keeping standard costs up-to-date can be a major problem. It may not always be possible to change standards to keep pace with the frequent changes in manufacturing conditions. For solving this problem, an optimum period for keeping standards without revision should select. It would inspire confidence in the permanence of the measures and also avoid administrative inconvenience caused by continuous modification.

    Not Suitable for Small Concerns;

    In small concerns, production cannot stand properly scheduled since frequent changes in production conditions take place. Therefore, standard costing may not be suitable for them. Detailed analysis may be meaningless and superfluous for them. If an efficient system of production planning stands established, the difficulty can be overcome and even small concerns can adopt a standard costing system; though the advantages gained by them may not be that much as availed of by large concerns.

    Costly for Non-Standard Product Industries;

    Standard costing may be found unsuitable and costly in the case of industries dealing with non-standard products and repair jobs that keep on changing to customers’ specifications. If some of the operations applied to different products are common and repetitive, standards may be fixed for such components or operations with advantages. The cost-benefit analysis should however be made before installing a standard costing system. If the costs exceed benefits, no system can be recommended for adoption, not to talk of a standard costing accounting system.

    Explanation of Variances Difficult;

    Due to the play of random factors variances cannot sometimes stand properly explained and at times it is difficult to make a distinction between controllable and non-controllable variances. A toning up of the variance analysis system can obviate this difficulty.

    Lack of Management’s Enthusiasm;

    If the management is reluctant to implementation of the system effectively, the success of the system will be in peril. By educating management about the likely advantages of the system, management can stand made interested in effectively implementing the system.

    Administrative Inconvenience;

    Carefully planned and operated procedures, as required under this system in respect of the recording of prices, time, quantities, etc. might not have stood adopted. However, any effective planning and control system must have a foundation on which to operate.

    Resistance from Within;

    The staff may take it as a threat to their freedom of action, feeling that they stand being directed down to the last detail on how work should perform. It also requires proper education of the personnel of the organization.

    Badly Designed System;

    If the standard costing accounting system has not been properly designed, many problems are likely to crop up. Supposing is a concern, material costs are of vital importance whereas undue emphasis has been laid down on labor costs, the system would not bring desired results. The existing problems must be taken due care of while introducing the system. The rigid marshaling of effort within a factory is a fact of like which must be accepted. Without attention to detail, there would be great difficulty in achieving a high level of efficiency.

    How do standard costs stand set?

    Standards should stand set for the quantities and prices of materials, labor, and services to stand consumed in performing each operation associated with a product. Product standard costs exist derived by listing and adding the standard costs of operations required to produce a particular product.

    Two approaches stand used for setting standard costs.

    First, past historical records can stand used to estimate labor and material usage. Secondly, standards can stand set based on engineering studies. With engineering studies a detailed study of each operation stands undertaken under controlled conditions, based on high levels of efficiency, to ascertain the quantities of labor and materials required. Target prices stand then applied based on efficient purchasing to ascertain the standard costs.

    How does a standard costing system operate?

    Standard costing is most suited to an organization whose activities consist of a series of repetitive operations and the input required to produce each unit of output can be specified. A standard costing accounting system involves the following:

    • The standard costs for the actual output stand record for each operation for each responsibility center.
    • Actual costs for each operation stand traced to each responsibility center.
    • Also, The standard and actual costs stand compared.
    • Variances exist investigated and corrective action stands taken where appropriate
    • Standards stand monitored and adjusted to reflect changes in standard usage and/or prices.

    What is the main purpose of variance analysis?

    There are very few plans that turn out exactly as planned. Even when the overall objectives of the plan exist achieved, some, if not all components of the performance will have varied from the sub-plans or standards that make up the overall picture. For example, a football team may win an important game, as planned, but within the team performance; there may be many aspects that the manager will analyze during and after the match so that performance can stand improved for next time.

    As in business, good points need to encourage, and less positive aspects need to exist discussed and corrected. In a game of football, a side may have won a high number of corner kicks, but conceded too many free-kicks in defending. There is little to stand gained for the next match if we do not think about the last performance in detail. Variance analysis provides a framework for business managers to break down the overall performance of an organization so that each element of the business can stand isolated and analyzed in turn.

    What are the causes of labor, material, overhead, and sales margin variances?

    Quantities cost variances arise because the actual quantity of resources consumed exceeds actual usage or vice versa. Examples include excess usage of materials and labor arising from the usage of interior materials, careless handling of materials, and failure to maintain machinery in proper condition. Price variances arise when the actual prices paid for resources exceed the standard prices or else. Examples include the failure of the purchasing function to seek the most efficient sources of supply or the use of a different grade of labor to that incorporate into the standard costs. How to calculate material, labor, variable overhead, fixed overhead, and sales variances.

    Standard Costing Accounting PDF Essay Image
    Standard Costing Accounting PDF Essay; Image by Mohamed Hassan from Pixabay.
  • Activity Based Costing: Meaning, Features, and Advantages

    Activity Based Costing: Meaning, Features, and Advantages

    What is ABC (activity based costing)? It is the collection of financial, operational, performance information tracing the significant activities of the firm to product costs in production management. In other words, the knowledge of find out estimates costs of production for product costs.

    What does mean ABC (activity based costing)? Meaning, Definition, Features or characteristics, advantages, and disadvantages.

    Activity-based costing (ABC) is a new term develop for finding out the cost. The basic feature of ABC is its focus on activities as the fundamental cost objects. It uses activities as the basis for calculating the costs of products and services. The Activity-Based Costing (ABC) is a costing system, which focuses on activities performed to produce products. ABC is the costing in which costs first trace to activities and then to products. This costing system assumes that activities are responsible for the incurrence of costs and create the demands for activities.

    For example, an online learning firm prepares tax returns; suppose Udemy teaches online students. Fees charge to products based on individual product’s use of each activity. In the traditional absorption costing system, fees first trace not to activities but an organizational unit, such as a department or plant and then to products. It means under both, ABC and traditional absorption costing system the second and final stage consists of tracing fees to the course.

    ABC activity based costing meaning definition features characteristics advantages limitations and disadvantages Image
    Activity Based Costing: Meaning, Features, and Advantages; Image from Pixabay.

    Definition of ABC (activity based costing):

    What is the ABC (activity based costing) definition? The following ABC definitions below;

    According to CIMA as;

    “Cost attribution to cost units on the basis of the benefit received from indirect activities e.g. ordering, setting up, assuring quality.”

    According to CAM-1 organization of Arlinton Texas as;

    “The collection of financial and operational performance information tracing the significant activities of the firm to product Costs.”

    It bases on the belief that in the production process various activities give rise to costs. Generally, Activity Based Costing (ABC) defines as an accounting technique that allows an organization to determine the actual cost associated with each product and service produced by the organization without regard to the organizational structure. Amongst various benefits associated with the ABC approach, one of the major ones is that it helps to define the activities of the organization in terms of value-adding activities.

    Features or Highlights or Characteristics of ABC (activity based costing):

    What are the ABC (activity based costing) features or highlights or characteristics? The following ABC features below;

    Features or Highlights or Characteristics of ABC (activity based costing) Image

    1. The simple traditional distinction made between fixed cost and variable cost is not enough to guide to provide quality information to design a cost system.
    2. It is a two-stage product costing method that first assigns costs to activities and then allocates them to products based on each product’s consumption of activities.
    3. They can use by any organization that wants a better understanding of the costs of the goods and services it provides, including manufacturing, service, and even non- profit organizations.
    4. The cost pools in the two-stage approach now accumulate activity-related costs.
    5. An activity is any discrete task that an organization undertakes to make or deliver a product or service.
    6. It bases on the concept that products consume activities and activities to consume resources.
    7. The more appropriate distinction between cost behavior patterns is scale related, scope related, decisions related, and time-related. In other words, cost behavior is all performance-related product costs.
    8. Cost drivers need to identify. A cost driver is a structural determinant of cost-related activity. The logic behind this is that cost drivers dictate the cost behavior pattern. In tracing overhead cost to the product, a cost behavior pattern must understand so that appropriate cost drivers could identify.

    ABC cost method is activity-based cost management:

    What is activity-based cost management? Cost management is an accounting method that calculates material costs, labor costs, management costs, financial costs, etc. according to certain standards by the current accounting system.

    This management approach sometimes fails to reflect the direct link between the activities undertaken and costs. Also, the ABC cost method is equivalent to a filter. It readjusts the original cost method so that people can see the direct connection between the cost consumption and the work they engage in so that people can analyze which cost inputs are effective. Which cost inputs are invalid.

    The ABC (activity based costing) cost method mainly focuses on the production and operation process, strengthens operation management, focuses on specific activities and corresponding costs, and strengthens activity-based cost management.

    Benefits or Merits or Advantages of ABC (activity based costing):

    What are the ABC (activity based costing) benefits or merits or advantages? The following ABC advantages below;

    Benefits or Merits or Advantages of ABC (activity based costing) Image

    Actual and accurate product costs:

    ABC brings actual, accuracy, and reliability in product costs determination by focusing on cause and effect relationships in the incurrence of the cost. It recognizes that it is activities which cause producing costs, not products and it is a product which consumes activities. In advanced manufacturing environment and technology where support functions over-heads constitute a large share of total or overall costs, ABC provides more realistic product costs. It produces reliable and correct product cost data in case of greater diversity among the products manufactured such as low-volume products, high-volume products.

    Knowledge and information regarding Cost Behavior:

    It identifies the real nature of cost behavior and helps in reducing costs and identifying activities that do not add value to the product, in other words producing costs. With ABC, managers can control many fixed overhead costs by exercising more control over the activities which have caused these fixed overhead costs. This is possible since the behavior of many fixed overhead costs about activities now becomes more visible and clear.

    Tracing of Activities for the Cost Object:

    ABC uses multiple cost drivers, many of which transaction-based rather than product volume. Further, ABC concern with all activities within and beyond the factory to trace more overheads to the products.

    Tracing of Overhead Costs:

    ABC traces costs to areas of managerial responsibility, processes, customers, departments besides the product costs. Costs tracing, accurate allocation of costs to various products lead to proper pricing policy. Also, Cost driver rates can use advantageously for the design of new products or existing products as they indicate overhead costs that are likely to apply in costing the product.

    Analysis and mentions of Non-manufacturing Costs:

    Some costs term as non-manufacturing costs; for example, product promotion or advertisement. Even though, advertising is a non-manufacturing cost which constitutes a major portion of the total cost of any product. These non-manufacturing costs can be easily allocated since the relationship between costs; and, their causes can properly understand by using ABC.

    Limitations or Demerits or Disadvantages of ABC (activity based costing):

    What are the ABC (activity based costing) limitations or demerits or disadvantages? The following ABC disadvantages below;

    Limitations or Demerits or Disadvantages of ABC (activity based costing) Image

    Service costs are High:

    Implementing an ABC system requires substantial resources, which is costly to maintain.

    Report or data collection problem:

    It is a complex system which needs a lot of record for calculations.

    Non-useable for small organizations:

    In small organizations, the CEO or owner or managers accustom to using traditional costing systems to run their operations and traditional costing systems often use in performance evaluations. Some companies are producing only one product or a few products; so, the ABC cannot apply in there.

    Activation or selection problem:

    Some difficulties emerge in the implementation of the ABC system; such as the selection of cost drivers, assignment of common costs, varying cost driver rates, etc.

    Different timeline of terms:

    Since there are a lot of steps and groundwork required to come out with a costing based on this system, it is quite a time to consume. For example, large companies for the best costing system they produce the large size of production and give many products to us, but small or single handle company produces and give a single product. So, the large or multinational company collects many records and ABC work easy for long-term periods, as well as small organizations for difficult in short-term periods.