Part A
The standard cost of a good or service is the pre-determined cost of a good or service depending on the various circumstances that surround the business. Standard costing is therefore is an accounting concept that helps to determine the standard cost of a good or service. The predetermined costs are compared to the actual costs and the difference makes the variances (Berger). The variances are analysed thoroughly to find out why they exist and also to find a way to mitigate the risks that come with it. Most companies, big or small, need the standard costing procedure due to various reasons.
Standard costing comes with its advantages and disadvantages. Companies of different types and sizes use standard costing to determine the cost of products and services offered (Drury). For any company to survive in the market, there has to be a survey done to determine what the actual prices are and to match them with the pre-determined cost. This will always help the company to set a right price.
The following reasons are why most companies do standard costing despite the limitations that will be mentioned thereafter.
- Standard costing helps managers to use the management by exception approach. This approach ensures that the managers are always alerted when the costs fall significantly outside the set standards. This helps them to be able to focus on the important issues just when they are needed.
- Standards vary across different companies and they affect the type of service offered or the quality of the goods produced. When the standard costs are viewed as reasonable by employees, it becomes much simpler to promote their efficiency and the economy as a whole. This is because standard costs help the employee to determine the worth of the work they do. If the costing is fair then it suggests that their work is up to per.
- Book keeping is a very trying task in any business and standard costs take a huge part in simplifying the accountants’ task. Book keeping records the actual cost for each job but if a standard costing is used, the standard cost for everything will be used to charge the jobs done.
- Standard costs are very important when it comes to responsibility accounting. This is the establishment of what the standard costs should be and who should be responsible for them. The actual costs that are under control can also be determined with this type of accounting.
- Standardisation of costs is useful in setting standards in the market. If the goods or services are of a good quality, it is very easy to set the standards in the market by making the goods and services worth the price that is attached to them. By fixing such standards, the competitors in the market will want to improve their prices and will, therefore, have to improve the standards of their goods and services. It is therefore clear that without standardisation it will be hard to determine the variances.
- Production plans and price policies are formulated through standard costing. There are various price policies that may be considered. The company may decide to use price ceiling or price floors in setting the standard price. The ceiling allows a good or service to charge the highest price in the market while price floors allow a good or service to charge the lowest depending on the market and other circumstances. Production plans are set alongside pricing. This is because pricing will determine how long the goods or services will be in the market for.
- Very many important decisions are made through standard costing. The managers find it easy to weigh the impact of their goods and services and through the variances. Finding out the variances in the costing equip the managers with enough information about the progress of the company as a whole.
These are the various reasons why most companies have chosen to use standard costing as a means to determine what they charge for their goods and services. The needs cover every type of business that may need to stay on top of its game in the market. There are, however, limitations that have pushed most companies to use lean management that determines cost through value stream mapping. There are many other alternatives but somehow standard costing manages to be the most popular among many managers. The major limitations are born out of the misuse of the principle of management by exception.
The limitations include:
- Preparation of standard cost variance reports is done on a monthly basis and is often released after the month has ended. The information on the report is consequentially stale and unable to make an impact on any decision as all the important decisions will have been made by the time of the release. Reports given on time but are approximately correct are much more beneficial than precise reports that are late. Some companies have, however, found a way to make the reports ready as often as possible in a month to ensure that the decisions made are well informed.
- Management by exception focusses on the negative and this may affect the morale of the employees. Employees need to be commended when they do a good work but if the management only puts them on the spot when something goes wrong, it will kill their morale and therefore lower their productivity. The subordinate staff will be tempted at some point to alter the variances for them to look favourable just to get away with a poor performance record. The variance can be altered through increasing the output in order to avoid unfavourable labour efficiency variance. The sudden rush to meet the target may compromise the quality of the output somehow.
- There are two main assumptions that have been made by labour quantity standards and efficiency variances. The first assumption that is made is that the production process is labour paced. This is not true because the output in many companies is not determined by how fast the labour is working but the processing speeds of the machines used. The second assumption is that labour is a variable cost. This is not true as direct labour may be fixed. The assumption leads to creation of pressure to work excessively in the processing and finished goods inventories.
- Another limitation is in the confusion between what a favourable variance is and what is not. A variance that will deviate in the favour of the company my help the company cut on losses but will inadvertently alter the quality of the goods or services. This may lead to a less satisfied customer and lower sales at the end of the day. In the end, neither the company nor the customer gain from the whole process.
- Standard cost reporting focuses on only one issue: meeting the standards. There are other issues that need attention too like maintaining and improving quality, on-time delivery and customer satisfaction. The tendency to emphasize on standards can be reduced by adding the supplementary performance measures that will help the management focus on the other objectives of the company.
- Growth is very important for any business. In as much as the maintenance of standards should be a priority, it is also very advisable to give growth a chance. Improvement of standards will enable the company to survive the very competitive environment. Managers are, therefore, focussing on continual improvement rather than meeting the standards. An easier way to make sure this happens is by taking an average of the actual costs and determining the standard costs from it.
These are the main limitations that are faced by the use of standardised costing but every one of them has been given a solution to neutralise the negative effects they may have. There is no process that is used to determine pricing that has zero limitations. The best way to view limitations is to create solutions for them that make them advantages instead of disadvantages. Most managers have managed to find a way to do this and get around the problems that are caused by standardised costing. The advantages of standard costing outweigh its disadvantages by far considering that most of the limitations can be easily turned to strong points while without the advantages, the company becomes irredeemable.
Part B
Strategic Management Accountants are the next generation management accountants in the sense that they are more versatile in their functions. Management accounting is supposed to incorporate strategy into accounting and directly connects strategy to value. For value to be gained in a company, there has to be a set strategy and management accounting sees to it. Some scholars have referred to SMAs to be the messiah of management accounting because of the broader area that it covers (Heisinger). There are various decisions that a strategic management accountant makes that are determined by cost and income data.
- Shutting down or keeping open part of the business
A strategic management accountant will always find a way to know what business to keep running and on what grounds. The main basis of this analysis will be the cost and income data. If the cost is more than income data, it means that the company is incurring losses. The best way to determine the weak link in a business that hinders it from success. When the cost differs a little from the income, there can be some level of tolerance hoping the company will get out of the rough patch. If the readings are any different, the strategic management accountant will find out where the problem is and solve it.
One of the methods to save a crumbling business is to cut on losses and maximise on the areas of the business that actually make profits. By cutting on losses, the accountant will be able to focus all the resources where they can generate more income. A business that minimises its losses and increases the value of its output is bound to make more profits than losses. By shutting down or keeping open a part of a business, the strategic management accountant will be seeking for strategic means to keep the business running. Shutting down the business should be a last resort when the only way to secure the assets and reduce further costs is by shutting down the business.
- Pricing products or services
Pricing products and services is done through various means. This however falls under strategic management accounting because the pricing of products and services grossly affects how they sell. The SMA will take advantage of the ready information about the competitors and from these, be able to make sound decisions on the pricing. A good SMA will look keenly into the issues that make the competitors put up the prices that they have against their goods and services. Attaching a certain value to the output needs a very keen eye and good judgement. SMAs will often need to know from the reports how well the company is doing in relation to the competition.
Ratio analysis derived from comparative financial statements will be important in helping the SMA to make very important decisions on pricing. Depending on the company’s preference, some prefer standard costing over value stream mapping derived from lean management. Regardless of the method that will be used to determine pricing, it is important that the SMA finds a way to regulate the prices in a manner that will generate more income for the company and at the same time reduce losses.
- Product mix and limiting factor analysis
Product mix refers to the different product lines that the company offers the customer. Decisions on the product mix are made by the SMAs and the relevant information is mainly from the cost and income data. The products that do not move as fast need to be minimally produced in a case where all the products are being produces in similar quantities. If most of the income comes from one product line, that line needs to be given production privileges more than the rest. The SMA will ensure that the customers get the product that they desire most on the shelves.
With an end game of maximising the short run profits in mind, the SMA will look deeply into the limiting factors and present an analysis that ensures they are well managed. Limiting factors are the factors that are in short supply and somehow hinder the company from furthering its goals and ambitions. This primarily involves constraints in sales demand and production constraints. The three areas hard hit by these constraints are; labour, materials and manufacturing capacity. Labour constraints are mainly about lack of sufficient skills or staff in general (Hoque).
The company may run out of materials that need to meet a certain demand. The company may be too small for its very demanding market too. These underlying factors will need to be deeply looked at by the strategists. There should never be a day when the demand is higher than the ability to supply. Decisions like a big expansion of the factory in all aspects may be a way forward but with the consideration of the funds available and the sustainability of the expansion.
- Make or buy decisions
Strategic management accountants make their decisions on whether to manufacture a product of simply purchase it based on costs and benefits. The conditions that would make the SMA to give a go ahead to manufacturing the product are if:
- The purchase price is higher than the manufacturing cost
- The manufacturer has excess capacity that could be used for that product
- The suppliers are unreliable
These are some of the factors that may affect the decision of any manufacture and make them go for manufacturing rather than purchasing. It is often a tough decision to make but most SMAs find a way about it. The go ahead should only be given if the manufacturer has access to the raw materials, has the needed equipment and the ability to meet the standards that the manufacturer requires. The choice to manufacture may save on a lot but it has its limitations and implications. There is a risk of losing alternative sources, design flexibility and access to advances in technology.
Qualitative Factors in Management Accounting
These are the qualitative factors that influence decision making in any business while considering the ramifications that may follow. There are several factors that should be considered and they are explained as follows according to Bhattacharyya (2011):
- External Reputation
The reputation of a firm is very important. If quantitative factors were the only ones to be considered, there would be an increase in profit and a significant drop in popularity amongst the customers. The brand name should make what it stands for known to all about the issues that surround it. Customers will always go for the company that stands for similar ideologies to theirs. It should therefore be made clear in a company that it should not always be about the money.
- Labour Relations
This is the relationship the company has with its employees. Most companies may want to increase profits by laying off some employees or by getting rid of a perk they have enjoyed for a very long time. A quantitative analysis may show profits and the bigger picture gets lost. The employees will be left sad and they will feel cheated and betrayed. A sad workforce is not a good workforce. A qualitative analysis will show how much labour is affected by afflictions towards the employees.
- Creditor Effects
The creditors are bound to make sound decisions if they are informed on the activities of the company that they fund. Information like the opening and closing of new stores, turnovers that have been done through a given time and so forth. Qualitative information on the company’s operations need to be shared to the creditors in order to help them perceive the company for what it is.
- Quality
Quality is often compromised by the option of cheaper raw materials. A company would rather compromise the quality for the profits rather than go for the expensive raw materials. The savings on cot may be transferred to the customer but the company will be identified with low quality products. Despite the prices attached to any good, the quality is often the value for the money spent by the customer. Saving on costs to produce cheaper low quality output may not be a wise move due to the poor quality that may end up affecting the image of the company as a whole.
Works Cited
Berger, Alexander. Standard Costing, Variance Analysis and Decision-Making: Managemant Accounting and Control. München: GRIN Verl, 2011. Print.
Berry, Aidan, and Robin Jarvis. Accounting in a Business Context. London: Thomson Learning, 2006. Print.
Bhattacharyya, Debarshi. Management Accounting. Delhi: Pearson, 2011. Print.
Drury, Colin. Management and Cost Accounting. London: Thomson Learning, 2007. Print.
Heisinger, Kurt. Introduction to Managerial Accounting. Boston, Mass: Houghton Mifflin, 2008. Print.
Hoque, Zahirul. Strategic Management Accounting: Concepts, Processes and Issues. Frenchs Forest, N.S.W: Pearson Education Australia, 2003. Print.
Koontz, Harold, and Heinz Weihrich. Essentials of Management. New Delhi [u.a.: McGraw-Hill, 2010. Print.
Rajasekaran, V, and R Lalitha. Cost Accounting. Delhi: Pearson, 2011. Print.
