Managerial Accounting- HI5017
Abstract
Managerial Accounting System is one of the essential costing systems for any company which can help to obtain valuable insights regarding the operation of the company. This report contains all the benefits, the potential level of the standard costing system, and its features that will help understand the system much better. Also, its implementation in a production company has also been discussed.
Contents
Features of Standard Costing System.. 4
Potential benefits of Standard Costing System.. 5
Australian organisation that is desirable for Standard Costing System.. 7
The design and implementation of Standard Costing. 8
Discussion on whether Standard Costing System in the company satisfies its feature in part A 10
The usefulness of the standard accounting system to the internal users. 10
Part A
Introduction
Management Accounting System operates in the financial data to assist in monitoring, executing decisions, and managing the finance of any particular business organisation. It also helps managers and firm owners to monitor the working of the company effectively.
The management accounting system is how particular company asses and measures, identifies, interprets, and communicates financial data to achieve desired objectives. There are sharp lines of distinction between managerial accounting and financial accounting (McKinstry, Kininmonth & Mathieson, 2019). The data provided by management accounting is to assist the managers of an organisation in arriving at better decisions. In contrast, financial accounting’s function is to give information to the outside clients of an organisation (Suloeva and Gultceva, 2016). To prepare better management accounts and reports, a manager needs to have accurate and valid statistical data to swiftly make daily interim decisions.
Accounting generally means measuring, identifying, and transferring financial information to arrive at sensible conclusions and judgments. However, the function of the management accounting system differs in the way in which it is applied (McKinstry, Kininmonth & Mathieson, 2019). Each and every form of management accounting system is shaped to give the various type of managerial information based on the need of the management for making the right decisions (Suloeva & Gultceva, 2016). There are multiple types of management accounting systems such as inventory management, standard costing system, budgetary system, and others. This report analyses the features and potential benefits of the standard costing system.
Features of Standard Costing System
A standard costing system refers to the estimated costs of producing a single product or maybe a number of units for an allotted period in the coming future. In a general sense, in a standard costing system, the costs of the products are decided beforehand, even before the products are being manufactured (Bowhill & lee, 2002). For instance, if a company wants to develop a product in 2022, then the cost of the products will be decided in 2022.
Standard cost is not approximated cost, which means what should be the difference between the predetermined costs and the actual costs. But standard costs should be determined and the actual cost of production.
Standard cost is analysed after taking into account the management level of better functioning. Hence, the standard cost determined on the assumption that 70% should be the same amount as the assumption of 80% efficiency.
Standard cost may be utilised as a means of price setting and for using the complete autonomy over the cost. It also incorporates the making of levels of various components of costs. Therefore, levels are fixed for the costs of labour, materials cost, and other costs needed for production.
Standard cost always takes note of the real performance in contrast to the determined levels in order to make the comparison between the two can be assessed efficiently.
The standard cost system takes into account that there is a systematic analysis between the standards and the real performance, and the differences between the two can be meted out (Edwards, Boyns & Matthews, 2002). The difference between the two is known as the ‘variance,’ and it needs to be analysed additionally.
Potential benefits of Standard Costing System
Helpful for making budgets: One of the advantages of a standard cost system is that it helps in making a better assessment of budgets. A budget is a product of standard cost; because it would be harder to negotiate the exact real cost of products on the day, the budget is fixed. Including this, one of the main responsibilities of the budget is to take an analogy of end results in the successive time frame in relation to that the standard cost employed will constantly arise in the time of the budget in financial reports (Paul, Cokins & Gary, 2020). It also helps to estimate the costs of labour, materials, and any other costs incurred in the production process.
Inventory costing: Standard costing helps in efficiently presenting out the time frame of the inventory balances report. However, the result of the report ought to not exactly estimate the real inventory cost but might be nearer to that. It may be very vital to update the standard costs constantly if the real costs are constantly changing (Quinn & Lynch, 2013).
Overhead functioning: If the time frame is too long to make a note of the actual cost in relation to the estimated costs in the inventory database, then the standard costing can employ the standard application of rate rather than accommodate the price for a limited time period to make it nearer to the real cost.
The setting of Price: An organisation uses different materials to make the products, so it can apply standard cost to make the estimated cost and include an edge on the client need. It ought to be a sophisticated system, but the shift in the sales sector to apply certain costs will rely on the customer to order the amount of products database. It also takes into account the shifting companies’ production cost for each and every various amount of the stratum (Rao, 2013). Today, various organisations apply the standard cost to compute and budget to fix the price of an asset.
Efficient cost control: Many organisations are applying standards because it helps to give information that the organisational management may have efficient cost control. The standard costing system takes note of both budgeted costs and the real cost involved in the production process. By analysing both the actual cost and estimated costs, if there is a difference, then the management can take necessary action to prevent the issue (Paul, Cokins & Gary, 2020). It gives valuable information; a standard costing system can be an important method of cost control.
Examples of the type of information that the standard costing system can help managers to make decisions
Management of Organisation: Standard costing system helps the managers to organise, show and report information during difficult times. It also helps the management to take every single step for the realisation of the estimated costs because the standard costs are reachable and ideal from the organisational standpoint (McKinstry, Kininmonth & Mathieson, 2019). The managers in charge of the organisation are capable of seeing the production process and efficiently control the cost, and also bearing the charge of the organisational constituents.
Efficient and Effective Decisions: Managers are solely responsible for making effective decisions, especially with regard to organisational finances. It allows lowering down the constraint by reducing the various other unproductive components of the production (Raiborn, Butler & Zelazny, 2013). The standard cost application also helps to organisational planning effectively and efficiently.
Estimation of costs: The responsibility of accounting managers is to evaluate the yearning proposition for the obtaining of total products. The standard costing system assists the managers for better financial allocation by estimating the required costs and budgets for the particular production.
Better management of Employees: The standard costing system also assists the managers by facilitating better management of employees and required resources. The managers should be cautious of the employees and very precise regarding the cost incurred in the production by dividing the proper function between them. In this manner, the standard costing system accounts for the efficient management of employees in the production process (McKinstry, Kininmonth & Mathieson, 2019).
Australian organisation that is desirable for Standard Costing System
Woolworths Groups limited is famously known for food, wine, and hotel operations. It is Australia’s seventh-largest company, established in 1924, and it has several food chains and different markets, and various metro stores. The standard costing system helps the Woolworth Groups to set estimate costs to facilitate benchmarks. One of the prime advantages of the standard costing system is to help and provide the accurate cost of the products in advance. The application of a standard costing system may help the aforementioned organisation to assess the better future cost of product, services, and process, which may result in achieving the company’s targeted objectives efficiently and effectively. They may apply the standard cost to constantly monitor the estimated costs rather than the previous using costs in great ways of making the decision in diverse fields like fixing the prices of a product, contract bidding, outsourcing, and setting other production techniques. The standard costs system helps to a better assessment of the budget; Woolworth’s groups can apply this system of accounting to coordinate their functioning plans for the coming future. This may assist this particular organisation in setting the prices of their products, taking into account the cost involved in the production process.
Woolworth groups can use the standard cost system to effectively control the cost. As an effective way of making a budget, this system of accounting helps to build the foundation within the different levels of the organisation’s managers. The standard Cost system also helps to evaluate the managerial performance in relation to the production process and successfully utilising the available resources for the betterment of the organisation in various ways. Hence, this may suit this particular company for the better management of their organisational system in order to realise their potential in the production process.
The application of the Standard Costing system may help this company to enhance competitiveness and profitability in the market sector all over different supermarket stores and metro stores. It might help in making better decisions in order to recognise and realise their opportunities for better advancements in the future. Therefore, the Standard Costing system may help Woolworths Groups to improve overall performance in the coming future for making this company one of the successful business company in Australia.
Part B
A peer-reviewed journal article that has been used is “Changes in the product costing process driven by the implementation of an integrated information system in a production company.”
The design and implementation of Standard Costing.
The MAS standard costing system was introduced in a company in order to know the unit cost of production that could help in determining the total production cost of a finished good. Though there are various types of costing system standard costing was chosen since it suited the type of production going on within the company. The company first took the initiative of implementing the costing system by estimation of all the cost components of its production. For instance, the company started to take the entire labour cost and labour hours in order to get labour tariff. The production volume of the company was taken, which could have helped in estimating every labour hours, machine hours and the labour costs. The company then started to define the operation staff for each production process whose job was to calculate the labour cost and the machine tariffs of each department. While implementing the costing system, the company decided to use historical data or even data from its plan of operation in order to adjust it with the new data or information. The main reason behind taking such initiative was to plan the direct production cost for the company rather than the indirect cost which tends to fluctuate throughout the entire year (Kumar, A 2019) The next step the company took was setting a standard for each price and quantities with hopes of achieving a situation where the actual cost is lower than the standard cost. The company wants to achieve a situation where the actual cost is lower than the standard cost because this variance helps to make a profit for the company. The management then directed its attention towards the variance in unit costs. The three types of variance related to the unit cost were found to be material costs, labour costs and indirect costs. The historical data to the variance was taken by the management and compared it to the planned or assumed data in order to identify every ineffective operational work that was taking place in the production process. Doing this helped the management to determine the variances among the planned costs and the actual costs in the production which was supposed to make the calculation of the standard cost of the newly produced produces and their prices much easier than before ( Farkas & Stephens, 2016). Also, the standard costing system of the company was designed in a way that allowed the management of the company to enabled them to take a quick step in fixing significant production affecting problems. In addition, the standard set by the company for each pricing and quantities also contributed to providing stability during the reporting periods, which would have been tough due to its month to month fluctuations. Also, the standard of cost for each element by the management would have allowed every department to work uniformly with the exact process of performance measurement throughout the entire company.
Discussion on whether Standard Costing System in the company satisfies its feature in part A
The standard costing system adopted by the company has shown mixed results within the company. It failed to satisfy some features but has also achieved some good results satisfying the features mentioned in PART A. It has been clearly given that on changing the accounting system to standard costing the revenue of the firm saw a drop of 8.42% since it was entirely depended on different product mix each time. It has also been given that the unit cost of the company was overestimated and too optimistic in some cases. Also, the overall standard cost of the entire operation was underestimated and found to be too optimistic. This can be supported by the results obtained from the production process where the actual costs production were $12,247 higher than the standard cost set by the company. The cost was 22.74% more than the standard costing set by the company (Falat & K, 2019).
On the contrary adoption of the standard costing system by the company saw the cost in variance drop to 7% straight from 31% which the company was experiencing for the last ten months on practising the actual cost method. Also, the standards set for the machine and labour tariffs were found to be close to the real costs, and the production waste was as exactly as planned in the standard costing system of the company. The overall system applied by the company could have failed since the company did not change the overall price of the finished goods. Some of the features satisfied by the standard costing system were not related to the final price of finished goods which means standard costing would have been achievable if the company decided to change the price of the finished goods as well.
The usefulness of the standard accounting system to the internal users
The implementation of the standard accounting system by the company was not very helpful to the internal users since the overall system failed to bring about major improvements for the company. Also, the internal users of the company failed to achieve exact variances related to actual cost and standard cost and was only able to achieve its variance range which was anything between 0-20%. Even though on using standard cost system the internal users became aware of the incorrect settings related to the routings and its billing on materials the standard costs still proved to be optimistic and failed to provide the desired results. Through the new integrated information system, the internal users hoped to achieve reliable information as well as results on its cost values but the standard cost system miserably failed in estimating the cost values and was found to be underestimated. Also, underutilisation of the company equipment and the system’s inability to absorb the entire factory costs further delayed the production capacity of the internal users forcing them to bring about major changes in its costing plans. The entire normal costing system was based upon actual wages of direct costs and planned indirect costs, whereas standard costing is entirely related to the estimation for indirect and direct costs. Though the internal users hoped in receiving relevant information from a standard costing system, which could have furthered their understanding with these changes, the newly integrated system of standard costing failed to do so. The company failed to achieve any relevant pieces of information on implementing the new costing system, which could have been of much use to the internal users. The few minor improvements but the overall failure of the Standard Costing System was therefore not very useful to the internal users within the company.
Two key lessons for the contemporary organisation on the practical use of Standard Costing System
It is crucial for every contemporary organisations to practice accounting systems effectively, which can help in improving their overall position in the market. Though the standard costing system in the article failed to do so, it still has the potential to change the entire costing system. Therefore the two key lessons as per the article for the contemporary organisations are
- As per the article, any company willing to incorporate new costing system or its costing methodology has to be fully prepared to change its product prices as well. Any company unwilling to change the product prices despite the implementation of another entirely new costing system will only fail to achieve good revenues as well as information related to the production process.
- Also, the article has shown it to be impossible to predict the flow of the revenue within the company every time a new integrated information system implemented. The flow of the revenues in such cases is entirely depended on the old prices for each material ( Hasan & Md Salim, 2016). Therefore, correcting these prices and the settings within the old system should be focused on before implementing the new system for the company. On failing to do so, the new system will fail to provide any relevant information to the companies and will only further hinder their current operations.
Conclusion
The report contains a brief discussion on the features and the potential benefits of Standard Costing as Managerial Accounting system. On completing the report it has been found that management decisions can greatly benefit from the managerial accounting tactics practised by the company. Successful implementation of the managerial accounting systems can help in increasing the revenues of the company. However, it isn’t very easy and requires an extensive amount of work before the implementation becomes a success. The main focus of any managerial accounting system is to provide relevant information related to its operations which can be then effectively used by the company. The relevant information extracted through the managerial accounting system will greatly benefit not just one department but the entire operation of the company and its various departments that function within its realm. Therefore, Managerial Accounting system is of great importance to every company and should be prioritised for better functioning.
Reference
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Fałat, K. 2019, “CHANGES IN THE PRODUCT COSTING PROCESS DRIVEN BY IMPLEMENTATION OF AN INTEGRATED INFORMATION SYSTEM IN A PRODUCTION COMPANY”, e-Finanse, vol. 15, no. 4, pp. 25-33.
Farkas, M., Kersting, L. & Stephens, W. 2016, “Modern Watch Company: An instructional resource for presenting and learning actual, normal, and standard costing systems, and variable and fixed overhead variance analysis”, Journal of Accounting Education, vol. 35, pp. 56.
Hasan, M.S. 2016, “VARIABLE COSTING AND ITS APPLICATIONS IN MANUFACTURING COMPANY”, International Journal of Information, Business and Management, vol. 8, no. 2, pp. 145-157.
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McKinstry, S., Kininmonth, K. & Mathieson, K. 2019, “The introduction and operation of standard costing at J&P Coats Ltd., 1925-1961: an institutional interpretation”, Accounting History Review, vol. 29, no. 3, pp. 369-389.
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Quinn, M., Flood, B. & Lynch, B. 2013, “STABILITY AND CHANGE IN MANAGEMENT ACCOUNTING: AN EXPLORATORY STUDY OF THE USE OF STANDARD COSTING IN AN IRISH MANUFACTURING COMPANY”, Accounting, Finance & Governance Review, vol. 20, no. 1, pp. 25-43.
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Rao, M.H.S. 2013, Exploring the Role of Standard Costing in Lean Manufacturing Enterprises: A Structuration Theory Approach, Maharishi University of Management.