standard cost accounting

standard cost accounting

The Importance and Implementation of Standard Cost Accounting in Modern Business Practices

1. Introduction to Standard Cost Accounting

Standard cost accounting can only exist in symbiosis with cost accounting. The cost is the result of a particular financial transaction: the sale of a commodity or the use of the material, labor, or service. A period is an accounting unit of time. Costs must be accounted for in terms of their underlying elements. The common factors in the historical and standard cost accounting systems are materials, labor, and overheads. The relationship between standard costing and historical costing is summarized below: the comparison of actual costs to standard costs provides management with a measure of the department of fabrication in which control is called for. The greater the division and diversity that exists within an organizational structure, the higher the level of specialist expertise in the area of operation and the greater the extent to which specialized systems can contribute to control. This is particularly true in a manufacturing unit where there will be several departments and many different production processes within each department. In terms of service, the personnel will also be spread over a number of departments. It is important to separate profit or cost centers, the output or volume of any of the sections of the organization, and the materials or services provided by support service functions. The use of standardized costing should only be considered when these activities pass certain tests of regularity.

Cost accounting is a part of the control system of an organization. It provides the necessary information for cost planning, cost control, and decision making, thereby facilitating the management in the process of formulating policies, coordination, operation, and control. Cost accounting acts as a management tool in practice by turning the accounting process into one of economical significance. An appraisal of cost accounting gives a statement as to whether a particular activity is carried on economically. The field of cost accounting is subtle, deep, and highly developed. Standard cost accounting is a powerful and effective aid to management in successfully carrying out the fundamental function of cost control. It helps in attaining predetermined goals at predetermined costs. In recent years, technological changes in the methods of manufacture and a drive towards an increasingly competitive world have made firms realize the importance of effective and efficient cost control. It supports and supplements cost accounting and serves as a foundation for operating control. Standard cost is a carefully determined predetermined measure of the amount of cost that should be incurred under known and/or expected operating conditions.

2. Key Concepts and Components of Standard Cost Accounting

Since costs are such a regular and high expense in manufacturing companies, a great deal of time and effort is often spent budgeting for costs, controlling performances, and reporting performances. By always emphasizing costs, entrepreneurs and other company personnel can learn to reduce manufacturing costs and still maintain or improve the quality and appropriateness of the company’s products. This paper provides many basic concepts and individual standard cost components so that readers can become familiar with them. Then their accumulation into a formal standard cost system or package is better understood. After reading and studying this article, readers have equipped themselves with knowledge and indicated improvements to help them do their business or their own work better when standard cost accounting is used in manufacturing companies.

Standard cost accounting is a key concept for managers and entrepreneurs who want to run a business and make it grow profitably. This paper introduces and explains the most popular concept in standard cost accounting in general and demonstrates its implementation for manufacturing companies in particular. The topic of this paper covers a wide range but presents the most common concepts and components of costs. These include the nature of standard costs, the uses of setting standards for direct materials, direct labor, and variable overheads, setting and revising standards, and the various kinds of standard cost systems in which standard costs are accumulated and reported. Business people should obtain some basic knowledge from standard cost practices regardless of whether they work in the accounting department. Understanding it helps improve individual and company performance by acquiring decision-making skills.

3. Benefits and Limitations of Standard Cost Accounting

Limitations under which total progress toward perfection will be possible include the varied natures and complexities of respective industrial establishments, the unique features of individual businesses, and the continuing modifications made necessary by the introduction of new production techniques and greater recognition of human relationships in the workplace. The primary functions sought to be satisfied by a standard cost system are to provide differential analysis throughout an accounting period. Experience to date has shown that it can do so advantageously for many businesses that can afford the additional clerical expense attendant thereon. The requirements which a standard cost system should meet, the dares and its uses, and the final benefits derived may best be appraised by briefly explaining them.

The primary reason for adopting a standard cost system is to measure the full performance of operations separately and promptly, after the end of the accounting period. The account executive should be interested in having a system in the cost accounting department that is capable of accumulating and bringing to his attention the information he requires for controlling operations and ensuring the continued smooth functioning of the business. In addition, as will be indicated in the following pages, a properly installed system will also enable the foreshadowing of the profits of future business activities.

4. Implementing Standard Cost Accounting in Organizations

As a result, it allows for earlier and more significant goal setting along with superior product suitability. It also enables the specification of record-keeping for operations based on standard unit costs, specifies data and results, and decreases severe misinterpretation of standard costs for non-production categories and variances.

Standard cost accounting is more significant and relevant in making valuable decisions for management. It is beneficial in correcting unfavorable conditions to improve profitability, managing overhead variances, and serving as a practical tool for management that reveals waste by volume, not value. Moreover, it depends upon valid decision-making by providing guidance to management on how to correctly identify all significant costs, design, market, utilize, and procure when sales/market prices per unit are calculated for fixed and variable costs.

This paper aims to identify the importance and implementation of standard cost accounting in sophisticated organizations. It has been found that standard cost accounting methods are more satisfactory even for the sophisticated problems faced by modern organizations. The paper investigates the prevailing problems and barriers faced by organizations in practicing standard costing methods and the problems they would face in the future. After recognizing these problems and barriers, suggestions are made to managerial practitioners. These suggestions include various benefits to overcome the problems faced by organizations in practice.

With the increased competition in business organizations operating globally, there is a switch over to sophisticated costing systems. Modern organizations consider costing as a strategic approach that has a long-lasting effect on organizational growth, stability, and sustainability. However, organizations often ignore more complicated and accurate costing systems mainly due to difficulties, errors, and confusion in implementing these systems. Therefore, they resort to practicing expanded standard cost systems which are economical and adaptable to volume costs, making them relevant for the decision-making process.

5. Case Studies and Best Practices in Standard Cost Accounting

For managerial accounting academic strategies, the case studies are discussed in terms of knowledge and skills to develop the graduate student skill set. Business cases give students practical preparation using standard costs in the real world and prepare students for work in unique employers. The cases provide both in-class and out-of-class learning experiences for students. Both before and after class, students have helpful learning method resources. Business case studies fully consider the basic costing concepts and potential solutions for addressing managerial accounting issues, with possible class activities, discussion questions, ethical issues, and problems to solve. Business information is given to allow students to help solve the managerial accounting problems presented in the business cases based on what they have learned and to lead to different conclusions from their study.

Case studies represent actual accounting systems that use standard costing and illustrate the real-world application of standard cost accounting for overhead allocation to products. The case studies describe business processes that use standard costing for managerial applications, and they aid in understanding and evaluating accounting transactions, managerial decisions, and the purposes of developing standard costs. The cases present multiple ways of implementing overhead cost accounting approaches, as these systems are designed upon product line output, computer graphics, customer order direct labor, engineering principles, and IDC and lean manufacturing facilities.