Use Standards Asc Essay

3958 words - 16 pages

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Introduction

Standard Costing became increasingly widespread at the beginning of the 20th century as a system for determining the manufacturing unit cost of a product, by setting standard rates and required material quantities for various production processes (Hyer & Wemmerl�v, 2002). Drury (2008) state that "Product standard costs are derived by listing and adding the standard cost of operations required to produce a particular product." The popularity of this technique increased significantly in the manufacturing industry, mainly because it could be used as a mechanism for managing cost, which could then be used to set product prices.

Over the years, standard costing systems have become more than just cost control tools by helping managers in other decision-making areas, such as performance evaluation and profit measurement. However, towards the end of the 20th century, standard costing has been increasingly criticised as an inadequate management technique. Authors such as, Kaplan and Johnson (1987), Ferrara (1995) and Monden and Lee (1993) have argued that standard costing is inconsistent in today's extremely competitive and global business environment. They maintain that standard costing can produce certain types behaviour that could threaten the survival of modern businesses. Despite, the growing concerns regarding the application of standard costing in a rapidly changing economic environment, standard costing has remained a relatively common tool among business managers and is still regularly taught to students on various accounting and management courses.

This paper aims to critically analyse the use of standard costing as a control technique in a new era. Firstly, standard costing will be examined so as to understand its application in the business world. Secondly, arguments from various researchers will be presented, which support and criticized the use the standard costing. Finally, these arguments will be weighed, so as to draw conclusions as to whether standard costing is still relevant in this new international economic climate.

What is Standard Costing and how is it used?

CIMA (2008) defines standard costing as a "control technique that reports variances by comparing actual costs to pre-set standards, so facilitating action through management by exception. The principle of `management by exception' which applies to standard costing, allows managers to focus on issues relating to costs that deviate from the pre-set standards. Wood & Sangster (2005) note that actual costs that conform to the pre-set standard require little attention, instead management should focus on those actual costs that produce variances and fall significantly outside the standards.

Horngren et al (2002) show that finding the standard cost of a product or service basically requires two groups of calculations. According to Horngren et al, standard costing "traces (a) direct costs to...

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