Upon realizing that standard costing and variance analysis had been de-established I made some enquiries and was informed that the process was a waste of time and demoralizing since the actual results were always different from standards.
It is true Management has got limited time and should not burden itself with activities that are time consuming and yield no benefits. Clearly, the system did not successfully provide the needed support necessary for the smooth running of operations. I am however of the view that standard costing is what we need to maximize time and resources.
I will therefore, like to suggest to Management that they re-establish standard costing system and variance analysis. This is because the principle of Management accomplishing set targets can be successfully achieved with the help of a well-structured standard costing system.
It is essential to note that Standard costing provides a valuable guidance to Management when formulating production policies. It will help management in preparing price lists, planning production of new products and providing appropriate costs estimates.
Standard costing system minimizes wastage by detecting discrepancy and suggests corrective actions based on the analysis.
With a properly structured standard costing system accompanied with full participation from users it will generate a positive, cost effective attitude through all levels of management. If we decide to adopt this system, cost centers will be established and responsibility assigned to the concerned departments and persons which will help to increase the effective allocation of authority.
A standard costing system provides a formal basis or serves as a rule of measurement established by authority to provide a yardstick for performance and efficiency evaluations.
By setting standards and performing variance analysis, we will be able to control costs.
This will help us set predetermined cost estimates that will serve as a basis for comparison with actual costs. It will also help control cost in our manufacturing departments. When you compare the actual costs to the standard cost and examine the variances between them, it will allow the account manager to look for ways to improve cost control, cost management accounting and operational efficiency. This will consequently simplify cost control procedures.
We will in effect be able to conduct stock and work-in-progress valuations, profit planning and decision making as a basis of pricing. The standard costing system encourages reappraisals of methods, materials and techniques that help to reduce the unfavorable variances. Standard costing can make the work of valuation of inventory easier because the inventory will be valued at predetermined costs.
In order to use predetermined standard costs, standards have to be set for each element of cost for each line of product manufactured or service supplied. Standard cost shows what the cost should be keeping in mind the most favorable production conditions, and on the assumption that plant will operate at maximum possible efficiency.
The collaboration of all functional departments is a must in setting standards. The quantities, price and rates, qualities or grades, terms of purchase, product substitution etc. have to be kept in mind while setting standards.
The line managers who have to work with and accept the standards must be involved in establishing them. There are strong behavioral and motivational factors involved in this process. The line managers must be involved in the critical part of standard setting. The human aspects of budgeting apply equally to standard costing.
The Cost Accountant has to determine the units of products to be made by producing cost centres and work to be performed by service cost centres. After application of service cost centres rates to production cost centres, a standard overhead rate has to be determined for each production cost centre.
After the standards have been fixed, calculations of variance will be done from the standards with the purpose of making the members of various management levels to know what the variances are, and who is responsible for it.
The purpose of setting standards is to fix yardsticks for measuring the performance of various activities and helps in responsibility accounting. Overhead recovery rates has to be determined in advance and applied on that basis to product/cost centres. There is always a difference in actual expenditure and overheads absorbed.
The success of standard cost system depends on the reliability, accuracy and acceptance of the standards. This system will help to draw management’s attention towards those items which are not proceeding according to plan and we will also be able to assign responsibility for non-standard performance in order to correct deficiencies and capitalize on benefits.
Although budgeted and standard costs are sometimes used interchangeably, budgeted costs normally describe the total planned costs for a number of products. However budgeted items are operated with a standard costing system to serve as a check for what activities actually took place and to check where the company is lacking and needs improvement.
This will give us a basis for estimating and provide guidance on possible ways of improving performance. Standard costing acts as an effective tool for business planning, budgeting, marginal costing and inventory valuation.
To have a perfect and effective system of budgetary control without standard costing is not ideal and we cannot implement proper budgetary control systems without a standard costing system.
In effect, the use of the standard costing is necessary for profit planning, inventory control, product pricing, decision making and cost control. The benefits of using a standard costing analysis and performing variance analysis extends to the concerns of profitability and efficiency in a rank-and-file activity rather than exclusive management functions. Standard costing places responsibility for identifying variance with line managers and thereby, integrates product or process efficiency interventions as a routine line activity rather than make it a specialized staff management intervention.
I hope that my petition will be considered, and the company will look into establishing a standard costing and variance analysis system. We after all, want to see all departments functioning at their utmost capabilities.