A standard costing and variance analysis

A model follow and fluctuation compendStudy suggests that many companies using up standard accounting to determine be and for measure performance. However, there has always been speculation on standard salute being the most effective measurement. The actual cost usually differs from the standard cost, which is based on calculations and assumptions. Standard accounting takes into account various factors handle price, specifications, quantity and quality of the material. The estimations involved in analyzing and pruneting standard cost involve the efficiency of the management. If a difference between the actual cost and the standard cost is observed, an investigation is required since it suggests the inefficiency in the calculation of estimates. relevance of Standard Costing and Variance AnalysisThe standard cost argon thinkd according to the following flowchart and the variance is monitored and recalculated at any interval to reduce cost variance.Definition of standard cos t a pre-determined cost calculated in relation to a prescribed label of working conditions, correlating technical specifications and scientific measurements of material and labor to the price and remuneration rates expected to apply during the period to which the standard cost is intend to relate, with the addition of an appropriate sh atomic number 18 of budgeted overhead (CIMA ICMA definition)The standard costs ar to be get along by the management after a set of calculations. These calculations discharge either be based on historical records or on engineering studies. Depending on the type of company and volatility in costs, a great deal of c be is to be taken into tantrum standards.Standard cost is usually applied in conjunction with some opposite be orders (or variance analysis)Absorption and marginal beJob and make costingBudgeting and budgetary controlAdvantages of Standard CostingThe costing standards are helpful in establishment of prices, budgets and turnout schedules. The employees are motivated to preserve efficiency to reduce errors in achieving a target. Management by elision is allowed to be practiced by variances. Record keeping and stock paygrade are harmonized and simplified due to a standard set of costing employ across the system. Responsibility is defined with the help of variance analysis. The technical analysis necessary to set standards will result in better rules, great efficiency and in cutting costs.The standards provide demand control schooling which help in comparing the actual costs to the standards.Disadvantages of Standard CostingFirstly standard costing will non be very efficient for companies that use a lean system. In lean production, the volumes produced are lowered and the inventories re consumed only after the determine amounts of the quantity demanded.Secondly, there might be budges in the working practices, the prices and volumes of the in the buff materials, which reduce the standards and are mi s call foring and inappropriate.Many costs are incurred in maintain and calculating the standard costing systems.Over assumptions of costs in an urge to make the standard costs favorable may lead to high cost variances. This may in addition lead to non-productive work bid measuring and completing forms.Standard costing is overly foc apply on statistical data and thence there might be a conflicting boundary between the standard cost and estimated cost. For example the overheads may require running at full efficiency even though the excess production is not required.Standard costing maybe applicable in larger firms with high production lines and bigger resources, but for littler firms, the basic thumb rule methods are more appropriate for use in control.Alternative methodsActivity Based CostingIn this method, the costs are recognized due to the cause and effect relationship between the activities and costs that drive the company costs. This method can theoretically be employ in a ny industry due to its flexibility in determining costs at different levels. ABC, just like the other traditional costing systems, it much results in recognizing in come in costs on easily identifiable figures such as school labor hours. It often results in inaccuracy in assigning the costs to its relevant activity.However, this method is used effectively in complex companies where certain costs are not easy to record and evaluate. It is used in companies which are not completely benefit based.Balanced score notificationThe equilibrise score card is used as a performance measure and for strategic proviso in major organizations. It was invented by Dr. Kaplan and David Norton that analyzed measurements in a compounding of traditional and strategic method to give a more balanced view to the management. The balanced scored had four main positioningsLearning and growth perspectiveThe scorecard considers learning as one of the most important perspectives in the case of employees and at an organizational level. Funds can be adequately allotted by managers to ensure the training needs of a histrion since the developing industry requires a unvarying improvement in the adroitness level.Business process perspectiveIn this perspective, metrics are used to allow the managers to escort the importance of their inwrought business and whether the products and operate are capable of satisfying the nodes needs. The metrics for a business process are best when designed by a highly experienced internal manager.Customer perspectiveThe constant increase in the market track from a customers perspective has increased companies to use metrics to define customer satisfaction levels. If the quality of the products and services reduce, the customer satisfaction would drop and consequently he would switch to a more competitive company. Hence, frequent measures such as the scorecard and customer feedbacks befool to be used to understand the customers requirements.Financi al perspectiveA company needs to constantly calculate its financial data and fix a capacity to fund the sure projects. The accuracy involved in this data will help the managers earn a planned and organized expenditure. Data such as the risk of exposure assessment and cost-benefit data has to be identified in this perspective. The standard costing requires accuracy in calculating this data since any errors could cause a large cost variance and affect direct labor and direct material cost.Target costingTarget costing is a cost management tool for reducing the overall product cost in a production heart cycle. This glide slope is most commonly used in Japanese companies along with Six Sigma, Kaizen and various other approaches. impertinent traditional methods, target costing takes a very proactive approach to determine. It analyzes the costing information of the product and suggests the best possible price upfront. This saves the wastage in duration and costs involved in re-engi neering and design. In particular, target costing concentrates on chassis wise reduction of costs in a product life cycle. The decisions involve a large team a multi-level team of staff from production, engineering, etc. to determine the acceptable market price.Just-in-time methodThe JIT method is one of the lean methods used in the new production systems. It is very efficient in supply chains and production units in determining the quantity of products to be produced depending on the customer requirements.However, JIT method also results in a few disadvantages such as purchasing take stock that is not required immediately. Due to the stock up of inventory, there are chances of the goods being damaged or lost. Also, the more assets a company is holding, the higher(prenominal) premium it has to pay. Thus having excessive assets is not an efficient option. Assets include some(prenominal) cash and inventory, but cash is more flexible and helps in precluding loans which mode lesser liabilities for the organization.When the demand increases, the orders would have to be rushed and thus greater staffing working in overtime is required. This would lead to an increase in the direct labor costs and also would reduce employee satisfaction. The company would also have to manage the orders in a short period of time which create a lot of trouble for the middle level management. This change in costs further affects the standard costing of a company.Total prime(prenominal) ManagementTotal quality management involves the continuous improvement of products and services while also involving the managers and employees in a quality management approach. TQM is aimed at increasing the quality while reducing the wastage in production of goods. well-nigh of the popular companies involved in the adaptation of TQM include Toyota motor company, crossing motor company, Phillips semiconductor and SGL carbon.TQM involves the continuous improvement of a process, and thus amend the futu re results of a process. It contains a combination of quality management tools which helps in increasing the quality at pace with the improving market standards.Kaizen methodsKaizen in Japanese stands for improvement in simple terms. When the word is split, kai means change and zen means good. The most important aspect of a kaizen method is to standardize your process. Most of the companies that follow the kaizen method use a PDCA life cycle.One of the leading motor companies using this method efficiently is Toyota motors. Toyota has extensively implemented the continuous improvement strategy in its lifecycle.The basic travel of the kaizen method involve the Plan-Do-Check-Act life cycle. As the title suggests, the first measuring stick of the process involves planning the costs and estimating the costs accurately. The next step involves measuring and implementing the costs and the effectiveness using various measuring techniques. The third phase involves checking whether the stand ards are optimal and efficient and if not act accordingly towards continuous improvement. After achieving the new results, these are set as the new standards and thus create accuracy. The cycle repeats itself continuously improving the process.Pricing decisions in service firmamentsMost healthcare organizations do not realize the benefits of standard costing in an organization and thus result in high cost variances. The application of standard costing systems used in such organizations can help in realizing the losses in unrecovered overhead on time and hence take corrective action.In todays world, customers in the service sector demand the prices to be lowered and a better cost information system. The most effective way to deal with this is to use standard costing and variance analysis. Full costs per unit should be measured in advance of providing a service. The variable costs can thus be easily estimated since the facilities in the service sector directly use the pricing process .