HI5017 Managerial Accounting Assignments Solution

HI5017 Managerial Accounting Assignments Solution

HI5017 Managerial Accounting Assignments Solution

Introduction

There are various cost accounting techniques which are followed by different organizations for different purpose like price fixation, calculation of budgeted cost or for many other objective. Standard costing is also a cost accounting technique which is used to calculate expected cost which is substituted for an actual cost in the accounting record and then helps to recognize the difference between expected cost and actual cost are calculated and recorded in the books of account. In recent days this technique is being widely used by many manufacturer to business analysis the variance between the actual cost of the product being produced and the cost that should have been incurred for producing such product[ CITATION Bai17 \l 1033 ]. Standard costing is mostly used to determine the deviation in the cost from the standards set by an organization and also helps to recognize the reason of deviation so the matters in regard to which steps are required to be taken to resolve the limitation should be informed of to the management. Standard costing technique involves the following step to get the effective results. Initially calculate or ascertain the standard cost; secondly, determine the actual cost; thirdly, evaluate the variances by comparing the standard cost with actual cost; fourthly, examining the resulting variances and lastly, by reviewing the results of variation, determining the appropriate action that are required to be taken to eliminate that differences. The primary objective of standard costing system is to help the management to taken effective decision on various matters of business that effect the financial position of company like price fixation of goods produced, decisions in relation to make-or-buy which will prove more beneficial to the organization, evaluating the performance level of different individual and also helps in implementing the system of budgetary control which is very cost effective for the entity[ CITATION Bar15 \l 1033 ]. The standard costing system has many advantages as well as disadvantages. The same has been discussed in brief below in this report. However this system of costing has many limitation still in current days many large companies adopted this system of cost accounting. Here we have considered two journals on standard cost accounting system for a better research. From the comprehensive study of both journal we can conclude that how this costing system can be useful in business environment[ CITATION Ben10 \l 1033 ].

Advantages of Standard costing technique

There are various advantages of standard costing technique, which are enlisted below:

1. This system of costing works as a controlling tool, hence helps the management as controlling device.
2. It helps the organisation in imposition of budgetary control system for effective management of the business.
3. It also provide assistant to management in several function like price formulation and policies relating to production[ CITATION Cal17 \l 1033 ].
4. Standard costing highlights the variances between budgeted and actual cost and also helps in the management to identify the area of inefficiencies and reason behind that.
5. Standard costing is considered as an effective technique s it helps in budgeting and planning as these cost are predetermined. It also helps in analysing the effect of change in the relationship of cost price volume which is useful for effective future decision making.
6. It also provide the mean in the prompt preparation of profit & loss account for short period foe analyse business trends which is very effective for prompt decision making.
7. This system of costing also helps in evaluating the performance of the staff of different cost centres with the help of in depth analysis of different variances[ CITATION Wer17 \l 1033 ].

Disadvantages of Standard costing technique

In addition to the advantages discussed above, standard costing technique suffers from few limitations as well. These drawbacks are as enlisted below:

The variance analysis highlight the controllable or non-controllable variance and stressed upon to recognise the reason of deviation and allocate the mistake accordingly. However the liability of executive is very limited which are authorised to be controlled by them. In order to effective allocation of liability responsibility it is important to segregate the variance into two aspects which is very difficult. Because of that sometime the staff behave reluctantly and hence it increases the work load[ CITATION Tru08 \l 1033 ].

The standard generally follow the entity’s average past result, maximum theoretical efficacy or its obtainable good yield, which are either too extensive or too brief. These gives a negative effect on the motivation and morale of the employees if these standard are too high, then it becomes very difficult for the employee to achieve the targets and thus possess undue pressure on the employees and create a negative impact in business environment. However something the management of the organisation set standards which are very high and practically impossible to be achieved, this lowers the confidence and morale of the employee and not able to give effective result.

The business condition of an organization keeps on changing because of which the standards is changing accordingly. Hence it is very important to constant revision in standard so that the actual results are become reliable to compare with the standard. However due to constant revision of standard many problem arise especially in adjustment of inventory. But the revising the standard on timely basis add value to the organisation and it also require management attention for better result but it is difficult for the management to give proper attention on regular basis.

Standard costing system is an expensive as well as time consuming technique. Since the degree of technical skill required in this system is very high. Due to continuous change in technology these system require regular update which also increases the cost of organisation along with involvement of huge cost in the implementation of system at the initial stage. Hence it is not beneficial for small and medium sized organisation to implement this system of costing as their financial resources are very limited. However the benefit of this system of costing is very high in comparison of cost involved in the initial implementation of system[ CITATION HEr17 \l 1033 ].

Discussion on the two journals

The two journal articles which have been considered in this report for discussion on the given topic are “Standard Costing Games that Managers Play” by Calvasina, Richard V and Calvasina, Eugene J and “How to Tell If Standard Costs are Really Standard” by Barnes, John L.

Explanation of the Selected Management Accounting Topic

In the first journal paper the matter of discussion is related to disadvantages and limitation of standard costing technique and misleading information provided by the system and damage caused because of those information is comparatively higher than the advantage it is believed to give to the organization. Hence from the above discussion one thing is cleared that the main sufferer of the system is the organisation[ CITATION Goo16 \l 1033 ]. And the first journal paper emphasizes on the matters relating to evaluation of improvements in the standard costing methodologies in a textile industry. The main focus on the updating the method and procedure continuously of standard costing in order to keep this system of cost updated.

Purpose of the studies and the research questions set out to be explored

The main objective of first case study is highlight the flaw of standard costing technique. The author initially observed from the study that there are three basic functions of standard costing technique. These are: initially the collection of actual costs of the manufacturing operations; secondly; achievement of the above manufacturing operation at expected cost and lastly the performance evaluation from the standard by comparing with actual and by reporting the variances[ CITATION Cal17 \l 1033 ]. The manager place heavy reliance on those data for decision making purpose and for detecting the area of non-compliance or which are not at par with the budget and keep a continuous review of work of cost center to check whether they are running efficiently to achieve the goals of organization planned for success of organization. In addition to that the author has also discussed the standard costing technique in reference various games, the first one of which is “Everlasting Standard Game”. Under this game the author has discussed the circumstances where either the company is small with nonexistent department of industrial engineering or with nonexistent department of industrial engineering or the manager of which thinks that implementation of standard costing technique is one time process and once implemented, no revision in standards are required[ CITATION Jef17 \l 1033 ]. At the time of formulation of company one standard quantity of material and labor was set if the company and continue the same for several years and not made any change. But after numbers of year revision is made only in respect of value that is labor and material cost but completely ignored the area of material quantity and labor hour where only the revision is required for effective results. This results in the manager’s reluctance to review the reports since the same data is being produced every year without any changing in value to the standards which are conventionally followed by the organization. Consequently, the significance of efficiency variance and material variance are ended. The second game is the “Unbreakable Schedule Game”, the author has discussed the standard costs are revised but only on the scheduled time set for such revision. No relevance is being given to the major changes in the costing or production techniques that are occurring between the dates set for revision. In many companies where the management of the company does not want to spend much time on accounting function of the company as the resulting variances are misleading[ CITATION Kne16 \l 1033 ]. The third game is the “Methods Change Variance Game” as per which disclose the problem associated with the labor efficiency variance. The main objective of calculating labor efficiency variance to calculate the difference between the labor efficiency based on the old traditional system that is currently followed by the company and the labor efficiency variance that would have been calculated based on the new standard, if it was currently employed. And report both the result to the manager to the organizational behaviour. But the cost of making both report are not fully evident. The fourth game is named as the “Material Mix Game”, this is basically the other version of the method change variance game, and the only difference is that it is in respect of material mix variance[ CITATION Bar15 \l 1033 ]. Under this system, in the production of goods different ingredients is used and the quantity of different ingredients are different. Only the total amounts of the ingredients are reduced with a change in their proportion. Hence the result of material mix variance turns out to be favorable. The fifth game is the “All Encompassing Standard”, material mix game under this game, company produces variety of goods which looks similar on outside but differ on its uses. However the average cost of the product are same but the proportions of the ingredients are calculated on the basis of strength that is provided by each product. In this game, the strength of the product does not match the standard strength as per the cost card. The sixth and the last game is the “Full Figure Standard Game”, in this game a very less addition in quantity of material and hours of labor made. Hence the result of variance turns out to be favorable. This method is adopted so that the expected standards are actually achieved by the organization[ CITATION Sit17 \l 1033 ].

In the second case the author focuses on the necessity of the continuous updating of the system of standard costing, especially in the textile manufacturing companies. The author was the chief accounting and controlling officer in Graniteville Company. The studied the system of standard costing adopted by the company and limitation observed by the author in the system. He raised some basic important question faced by the team in respect of the system. Like, cost accounting goals and objective of company, problem with respect to cost accounting system, what are the plans of company to achieve their goals and what are the actions taken by the company to resolve their problems. Here the author observed the various goals and objectives of the cost accounting and review the system whether the system have the capability to provide which are accurate and reliable for timely result. So, that the management take effective decision in a timely manner at all segment. It is necessary to exclude to all intracompany profit centers from the cost system to get the appropriate result and incorporate all the activities in the cost system. The standard cost relating to the activity is shown along with the optimum practical capacity of the plant to judge the efficiency and tom review whether the goals of operating management is achievable or not and how much difficult for the organization to achieve those targets. In order to forecasting the gross margin and evaluating the performance by comparing expected cost with actual cost. The information become more reliable if company considers standard cost with respect to estimated sales price[ CITATION Han03 \l 1033 ]. For the development of standard cost relating to inventory it is mandatory to evaluate the carrying cost of the inventory. The author has also discussed the major area of limitation of standard costing which reduces its value. These are: documentation of system of cost accounting, incorporation of significance of cost accounting system in general accounting system where the general costing system not able to capture all the data and provide inappropriate results which effect the decision of management. The payroll and data collection system provides inaccurate information. In order to eliminate all these limitation the author has done the extensive study of the system and provide recommendation that it is necessary to implement various control techniques for data relating to payroll data collection and reporting; production reporting; dyes and chemicals; maintenance and capital expenditure, supplies and raw materials; and update the system on regular basis used by the project team. In addition to all the author also suggest that the system is managed by a set of skilled staffs so that they can utilize the system properly. Hence the management plan to develop an automated mechanisms that collect data automatically and for the purpose of inquiry so that the flow of basic information could be done without any clerical error associated with the process[ CITATION Wil171 \l 1033 ]. Apart from that management also develop an automated mechanism for variance calculation, cost determination and cost revision as per market change.

Similarities and differences between the findings of the 2 studies

The similarities between the two studies are enlisted below:

1. In the given both case studies the main area of focus is on the updating of the standards of the standard costing system on a continuous basis.
2. The primary objective of both the case studies was improvising the cost accounting system.
3. The differences between the two case studies are enlisted below:
4. The first case studies have emphasized on more different approach that could be adopted in the standard cost for better results whereas the second case study emphasized on the way how to enhance the standards of cost accounting system[ CITATION Mar18 \l 1033 ].
5. The first case study has talks about considering the application of standard costing system in any organization while the second has talks about the requirement of costing system in textile industry.

Specific outcomes and relevant learnings from the research findings

From the extensive study of both the case studies many thing learned which would be highly beneficial for the Australian Companies who have adopted or look forward to adopt this costing system. The key points which might be useful for the Australian companies learned from first case study are listed below:

The standard should be reviewed and update on continuous basis rather than waiting for the date set for revision. The revision in the standard made according to the major changes that occur in the costing system.

The standard must be relevant. If any change in made in the layout of plant as per management decision simultaneously change in cost card relating to material mix is also required to get the appropriate and reliable result[ CITATION Sim16 \l 1033 ].

The standards followed must be realistic and there is not space of ambiguity. The standards set for overheads like material, labour and manufacturing overheads must practical which is achievable.

Standards followed must be based on future. And the standard set for future based on past performance and if necessary it should be update accordingly.

From the second case study the point noted which might be useful for the Australian companies are as follows:

The textile manufacturing company, Graniteville Company suffered from some limitation regarding the costing system, and to overcome from those limitation some automation mechanism is required for costing system that automate the process of documentation and simplify the complex task[ CITATION Fél17 \l 1033 ].

The efficiency of the standard cost system can be further increased by preparing the standard cost reports and the cost ledgers in the budget formats.

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