Critically Examine the Use and Shortcomings of Standard Costing and Variance Analysis

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According with According for Management, standard cost is a planned or forecast unit cost for a product or service, which is assumed to hold good given expected efficiency and cost levels. It represents a target cost and is useful for planning, controlling and motivating within an organisation. In order to be able to apply standard costing it must be possible to identify a measurable cost unit. This can be a unit of product or service but it must be capable of standardising, for example: standardised tasks must be involved in its creation. The cost units themselves do not necessarily have to be identical, for example: standard costing can be applied in situations such as costing plumbing jobs for customers where every cost unit is unique. However, the plumbing jobs must include standardised tasks for which a standard time and cost can be determined for monitoring purposes. Standard costing can be used for budget preparation (e.g. planning), control through exception reporting (e.g. performance measurement), stock valuation, cost bookkeeping and motivating staff. Under a standard costing system an organisation can value stock at standard cost, incorporating this within the ledger or cost accounts of the organisation, the budget or forecasts being a memorandum kept outside the ledger accounts. However, it can be difficult to apply standard costing in some types of service organization, where cost units may not be standardised and they are more difficult to measure. The standard cost may be stored on a standard cost card but nowadays it is more likely to be stored on a computer, perhaps in a database. Alternatively, it may be stored as part of a spreadsheet so that it can be used in the calculation of variances. According with CIMA, there are three types of standards: basic, ideal and attainable. A basic standard may be defined as a standard which is established for use for an indefinite period which may a long period. These standards are revised only on the changes in specification of material and technology productions. It is indeed just like a number against which subsequent process changes can be measured. Basic standard enables the measurement of changes in costs. Ideal standard represents a high level of efficiency. It is fixed on the assumption that favorable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labor time for making the production will be minimum and rates of wages will also be low. The overheads expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favorable and only then ideal standard will be achieved. As result, the ideal standard is not practicable and may not be achieved. The deviation between targets and actual performance is ignorable. In practice, ideal standard has an adverse effect on the employees. They do not try to reach the standard because the standards are not considered realistic. On the other hand, attainable standard is a challenging standard. Unlike the ideal standard, it does not assume that favourable circumstances prevail. There has recently been some criticism of the appropriateness of standard costing in the business environment. The main criticisms include: sometimes hard to define an ‘attainable standard’; uncontrollability of performance within operations (e.g. discounts lost due to the reduction in the quantity ordered or seasonal price fluctuations within the period of appraisal); with more automation within operations, they become less valuable as information; feedback not feed forward control (e.g. out of date information); revisions to standards may be too frequent to guide performance over time; standard costing is an internal not external control measure (e.g. improvement also needs to consider competition and customers); performance measurement would be inadequate as a process if the standard is wrong; the...
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