Standard Costing. OBJECTIVE 1: Define standard costs, and explain how standard costs are developed, and compute a standard unit cost. What are the benefits organizations derive from standard costing and variance How will standard costing be affected if a company uses a single conversion. LEARNING OBJECTIVES: After studying this unit you will be able to: • Understand terms as standard Cost, standard Costing, standard Hour. • Understand how.

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PDF | Standard costing is a traditional cost accounting method and still an important aid to management for cost control purpose. The aim of this. A standard costing system is a method of cost accounting in which standard costs are used in recording certain transaction and the actual costs are compared. Standard costing is a technique which uses standard for costs and revenues for the purpose of control through variance analysis. Here, standards are.

Skip to main content. Log In Sign Up. Effectiveness of standard costing system in cost control within the motor industry. Million Gubunje. Student Date ……. Supervisor Date …….

Standard costing system supports the valuation of inventory. When the number of inventory units existing is identified, the inventory value is then reached at by multiplying the existing units by the standard cost per unit Bhimani et al For the motor industry, when the motor spares in the shelves do not tally with the quantities binned in the computer system, at end of the stocktake, an inventory valuation is carried out.

The new quantity of inventory that is multiplied by the inventory price would be the physically present quantities in the shelves. Valuation reports sent to management also assist the management in making informed decisions of how to control theft and wastages of motor spares. Motivation of employees is enhanced through the use of standard costing system.

According to De Waal maximum participation is required from all members of the organisation when standard costing system is being appropriately implemented. The full participation triggers a zeal of goal achievement in the personnel of the organisation which has a motivating effect and the employees feel more responsible to the decisions made regarding cost control.

Standard costing system comes with elimination of inefficiencies such as material wastages. Various cost elements calls for in-depth study of the aspects that results in cost upsurges and this thorough study ultimately result in the curbing of unnecessary wastages resources Kaplan and Atkinson, Studies are carried out on each and every possible cost centre so that when it is finally decided to set anticipated results, they will be comprehensive of as many factors as possible Anderson et al, When wastages are eliminated in the servicing of motor vehicles, costs of over-consumption of material are reduced.

For the administration department, recording of all stationery items upon issuing of new stationery is another way of keeping costs to estimated levels. This costing system also supports management by exception in that focus is put on correcting the responsible centre. According to Long Ho , management by exception basically means that the management supervise all the operations and each and every member of the organisation is expected to work towards the attainment of targets.

The time that management save in focusing to points of correction can be ploughed in other activities that are not cost related but are in line with profitability maximisation, such as identifying new markets to exhaust.

There is simplification of performance appraisal through the use of standard costing system Datar et al, It has been established by various scholars that standard costing develops cost awareness within the entity. When there is cost awareness in the entire entity, it is easy for management to carry out variance analysis.

When performance is evaluated and targets met, management can organise for a party to motivate the employees and encourage them to keep putting their maximum effort in work Laurie, Standard costing remains a widespread tool for businesses because it does result in reduced costs and in many Japanese companies such as Toyota Japan, the use of standard costing has significantly reduced costs Long Ho, Chapter Three will illustrate the research methodology of the study, showing the methods the researcher will use on the study.

Flick expounded a research methodology as a defined avenue that a researcher takes in solving a problem addressed by the research. The research design, population studied, sample size and design, sample procedures, sources of data, data collection instruments, reliability and validity of data, data presentation and analysis, ethical considerations are all included in this chapter. A summary to the chapter is also included at the end of the chapter.

The above implies that a research design is the ultimate plan for relating the theoretical research problems to the relevant empirical concern. Flick noted that a research design can either be descriptive or explanatory.

The research used the descriptive research design. According to Bryman and Bell , a descriptive research design is a structured research design that provides a valid and accurate representation of the variables that relate to the research questions. A mixed research method was used in conjunction with the descriptive research design.

Another justification for mixed method approach by Harwell is that both qualitative and quantitative approaches address the how and why research questions that are commonly asked in research studies.

The mixed research approach can be implemented on a case study or a survey Harwell, The researcher used the case study. On that note, Yin defined a case study research as an approach to research that allows the exploration of a phenomenon within its context through the use of data sources. Yin further opined that case study research design is used when there is need of answering how and why questions, and when covering contextual conditions relevant to the phenomenon under study.

In addition, Daniels described a case study research as a comprehensive study of a particular research problem instead of an extensive statistical study. By focusing on a specific case, the researcher managed to use the descriptive research design to comprehensively address the research matter.

South East Toyota Pvt Ltd has a total number of fourteen employees and these formed the study population for the research. Table 3. The sample size differ from organisation to organisation depending on the size of the organisation and the complexity of the problem under study Harwell, Sample sizes can be the whole population census or just a portion of the whole population.

The fact that sample sizes differ from entity to entity, exposes the need of developing a sample design before carrying out the research so as to collect adequate data.

According to Bryman and Bell , sample designs exist in various forms and in coming up with the best sample design, the researcher takes into account the sample size. The sample size that was chosen by the researcher for questionnaires was fourteen, which was the entire population and two for interviews. Receptionists and general hand workers were included in the sample because of their contribution to operating costs of the business.

Sampling procedures consisted of the various criteria used in coming up with samples during data collection. The researcher carried out a systematic sampling of the whole population. An advantage of carrying a census was that it increased the reliability of research feedback since all members from the population were part of data collection.

Various sources of data are relied upon in carrying out a research. Many scholars on business research methods have argued that the wider the sources of data, the more comprehensive and helpful the research findings will be. Hair et al furthermore postulated that the research environment provides the sources of data.

Data sources resulted in data being categorised under primary data and secondary data. According to Blaxter et al , primary data is a necessary part of validation of a research study since the data collected is specific to the study matter. Primary data proved the relevance of the case study for the research.

Primary data collection was tailored to meet the specific needs of the researcher as interviews questions were altered in relation to individuals that were being interviewed. The researcher managed to get access to the management accounts of the company for the past three annual reporting periods. Secondary data also supplemented the questionnaires and interviews carried out. A questionnaire is structured by the researcher so that a desired result is achieved. Questions are drafted to address the research questions so as to enable the researcher to reach a certain conclusion.

The Likert scale, open ended and closed questions types of questions that are found on questionnaires Flick, The researcher made use of the open ended questions and the Likert scale type of questions in collecting information from respondents.

This means that respondents can answer the asked question in their own words and expression. Open ended questions are very useful in addressing complex and controversial matters as they are used in searching for additional information Hair et al, Since respondents were free to express their answers without any restrictions, the responses were helpful since they disclosed some areas of concern missed by the researcher during structuring the questions.

In addition, the researcher used the Likert scale type of questions to collect information from respondents. It is normally used when responses for more personal information about respondents is required, such as age.

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A benefit of the Likert scale was that it was easy to understand and for that reason, respondents did not have to put much effort when answering. Data was tabulated using the Likert Scale and this eased data analysis for the researcher.

The respondents were given a minimum of sixty minutes to complete the forms.

Formulas of Standard Costing

During this time, the researcher moved around assisting respondents who needed help understanding some of the questions asked on the questionnaire. When the time elapsed, the researcher moved around the departments collecting the questionnaires from all the respondents. The researcher ensured that no other member of the organisation went through the responses after collection by attending the interviews with all the collected questionnaires.

An interview is defined by Remler and Van Ryzin as a mutual conversation between two parties, one being the interviewer and the other being the interviewee, with the aim of the interviewer gaining sufficient information about the interviewee. Many scholars regard an interview as the most common type of primary data collection. Carrying out interviews allowed the researcher to restructure questions to meet the various persons being interviewed.

The accounting personnel and management where interviewed since they are more closely related to cost control than the rest of the staff. Some questions were even tailored to meet the attitudes of the interviewee so that the researcher would get the most from the interviews. Interviews facilitated quick feedback than questionnaires. Face to face interviews and telephone interviews can be used in carrying out a research.

Formulae on Standard Costing

Face to face interviews are a dialogue between the interviewee and the interviewer done in the physical presents of both parties Ritchie et al, Face to face interviews enabled the interviewer to assess the non-verbal cues from the interviewee which resulted in comprehensive data collection.

Telephone interviews are a dialogue of the interviewee and interviewer via the telephone call. The session lasted forty minutes. The interviewee was provided with the interview guide to refer to during the interview session. The interview session provided the researcher with other relevant data that he had not included in the questions.

A reliable research enables another researcher to reach a similar research conclusion using the same research method used by the researcher in addressing the issues in the current research.

In coming up with the research, the researcher made use of authentic sources to gather research data. Interviews and questionnaires were structured in a way that addressed the research questions of the study. The researcher ensured validity of the research by making use of the research instruments that best fit the study and by gazetting questions for respondents that were pertinent to the research.

Data presentation gives a quick visual impact of the dispersion and organisation of data such that even those who have less knowledge of the data in discussion can easily understand the message being communicated by the data. Since the mixed research method was used in data collection, there were differences in the presentation of qualitative and quantitative data. For quantitative data results, bar graphs, pie charts and frequency tables were used to ensure comprehensive presentation and for qualitative data presentation, descriptive writing was used.

Tables were used since they were simple to understand in data analysis. For interviews, responses were summarised. These presented all that was said by the interviewee. In data analysis, the research findings are related clearly to the research questions and the reliability of findings to the research theory and its related concepts. The researcher made use of the graphs, charts and tables to interpret, arrange and develop data into sects that revealed useful information which the research used to base research conclusions.

The researcher analysed the data that was collected from both secondary and primary sources. Ethical issues sometimes cause the respondents to withhold vital information during data collection which would affect the reliability and validity of the data. To ensure confidentiality and obscurity of the collected data, the researcher assured the respondents that the information they gave was to be kept confidential and their identities were not to be disclosed for the information they gave.

The researcher stored the collected data in a safe place that contained security a lock to access. In the questionnaires given, no name or respondent identification was requested prior to question answering. This ensured data confidentiality and obscurity. Another ethical matter considered by the researcher was informed consent. The researcher issued a consent form which was filled in by the respondents before the collection of data.

Before information could be used in the research it was important that consent be obtained from the respondent. This involved the completion of a consent form. The research gathered knowledge on how to carry out a research before data collection. Therefore, the researcher managed to retain the objectiveness of the study throughout the research by taking the possible related ethical matters into consideration. Chapter four will be the presentation, analysis and interpretation of the research findings.

Demographic matters, cost related concerns and profit maximisation related issues were presented and analysed in this chapter. At the end of the chapter, there is a summary to the chapter. The set-backs that caused the other three members not to respond included that two of the workers had taken leave days and the other one was no longer with the firm due to employment contract termination.

The response rate has been tabulated below in Table 4. Table 4. The responses pertaining to the period of employment have been presented in Figure 4.

Therefore, it is assumed that their responses were reliable and can be reasonably used as a basis of making recommendations by the researcher. According to Christensen et al , the more educated the respondents, the more reliable the research findings will be. Though most of the population have experience, Horngren et al argued that the lack of highly qualified personnel sometimes affects negatively to the effective implementation of costing systems.

The responses collected have been presented in table 4. The majority of the population knew that standard costing system was being implemented to control costs and no one from the respondents disagreed, meaning that the cost control system was known. Siyanbola et al noted that when the cost control efforts of an organisation are known across board, then it becomes easier to develop supporting approaches and policies that ensure effective cost control.

Their responses would reflect whether challenges in the setting phase where because of lack of awareness or understanding.

The responses collected have been presented below. This then infer that employees acknowledge that standard costing system has potential of effectively controlling costs within the entity. According to Bhimani et al , standards setting forms the core of cost control and when achievable standards are set, effective cost control is realised.

Laurie noted that communication is key in the attainment of organisational goals. According to Drury , standards are derived from budgets that are prepared and the budget figures are a composition of departmental estimated inflows and outflows of resources. Figure 4. However, the implementation of the costing system is a responsibility of all personnel of the organisation with management monitoring the implementation process Denscombe, This entails that, there is need for the management to educate further its employees on the implementation of the costing system for it to be effective in cost control.

The management of costs also relates to the management of activities that relate to standard costing system implementation. The above responses point toward that management needs to look into the ways in which it can motivate its employees so as to effectively manage costs in the company. Laurie pointed out staff motivation as key in ensuring effective management of activities within the entity.

The responses collected are presented below in Figure 4. As noted by Weygandt , if management address costing system implementation problems, there will be an upturn in effective cost control. On the same note, Becker et al highlighted that an important aspect of process-focused thinking in a company is the horizontal cooperation of all participants in achieving a common goal.

For that reason, this question was asked. The collected results have been presented in table 4. These results will be areas of regular check in confirming the changes in effectiveness of the costing system since they arose because of poor implementation of the costing system Horngren et al, With pricing, OCNEANU et al postulated that in a market economy where prices are predicated by confronting supply and demand, pricing and tariff fees are regular, which causes instability for the standard value over time.

According to Marie et al , the problems related to standard costing implementation, result in costs of the entity increasing since standard costing system is there to reduce costs. Cost reporting plays a key role in effective cost control since it provides management with information to base cost related decisions on and take possible corrective action in time Hanfy, Of the two management personnel that the researcher wanted to interview, one was conducted.

The reason was that one of the prospective interviewees was busy with work so one representative attended the interview. The interviewee said that South East Toyota is a private limited company that operates under Croco Holdings, thereby making it a more of a subsidiary of the holding company.

The interviewee further stated that the company is governed by both Toyota Zimbabwe policies and Croco Holdings policies since it owes its existence to both.

This relationship affected operations management of the entity and ultimately cost control. He pointed out that due to the losses incurred, the company failed to maintain the market share that it used to have and it had to cut on manpower since jobs done per day declined.

Turnaround time increased because of the payment system and eventually sales figures dropped which contributed to losses. Centralisation also increased transportation costs of documents sent to head office of Croco Holdings in Harare for authorisation for every payment that had to be made. He also noted that when policies are too sticky, employees are demotivated and it becomes difficult for the company to be profitable.

From 4. In support of this assertion, De Waal argued that motivating employees is an essential duty of management as it has an impact on the organisational success.

Responses on questionnaire 4. Acknowledging the relationship between cost control and profitability, Periasamy postulated that there is a direct relationship between costs and returns of an entity.

However, he also noted that due to the unstable economy, it is hard to stick to fixed standards. In addition, the interview opined that standards should be flexible, thus set within ranges so that they can be used to effective control costs.

On question 4.

Test Bank - Chapter10 Standard Costing - Free Download PDF

In his research, Ngozi noted that in many Nigerian manufacturing firms, standardisation led to better coordination of activities which largely improved cost controlling. He noted that the communication channel during payments processing was ineffective due to centralisation.

The interviewee further cited an example of freight charges which increased costs of the company, and management could not do much about it because it is company policy to send all payments documents to head office for authorisation.

According to Kimmel , responsibility accounting contributes to effective cost management since managers of cost centres will be fully responsible of the activities and communicating plans in those cost centres. Marie et al renowned that set standards get obsolete due to the fast changing business atmosphere. He noted that it would be quicker and easier for management at the company to give feedback on reports that management at the head office of the holding company.

Under questionnaire 4. Respondents from questionnaire 4. From these, the researcher noted that of all operational costs, the carriage costs for the company had increased significantly as compared to values and where already beyond the budgeted amount for the six months. The cost reports noted that carriages had mainly increased because of strictness in centralisation policy which resulted in all payment documents, from those paid by petty cash, to be sent to Croco Holdings headquarters in Harare for authorisation and forwarded back to the company in Chiredzi after being approved.

The charges for carriages were all billed on the company. According to Hansen et al , the main motives of developing a standard costing system are that it assists executives to manage costs, improve control and planning, enable decision making, and facilitate product costing. Therefore, when the management at South East Toyota do not have influential power over operational costs, it becomes difficult for standard costing implementation to produce the desired results.

Responses to questionnaires and interviews that asked on background information of respondents, cost control and costing system matters were presented, analysed and interpreted in the chapter. Chapter five will be on the summary of the researcher to the entire study, overall conclusions and recommendations. In this chapter, the research findings will be related to the research objectives of the study. The introduction to the research study was done in chapter one. It consisted of the background of study which gave insights on the challenges being faced in the company as a result of poor standard costing system implementation.

The chapter also pointed out the main research objective, sub-objectives and the related research questions to the study. The importance of the study to the institution, researcher and company was illustrated under justification of the study. Major definitions, abbreviations, delimitations and limitations of the study were also included in this chapter.

Chapter two was on literature review which established literature from authors and other scholars related to the research objectives of the study. The literature reviewed was on establishing the relationship between standard costing system and cost control, discussion of the cost management challenges, standard costing implementation problems in the motor industry, ways of effectively controlling costs and a discussion of the use of standard costing system in cost control within the motor industry.

Chapter three focused on research methodology. In order to present the variables relating to the research questions, the researcher used descriptive research design. The research methods, data presentation, its analysis and the research instruments used were included in chapter three.

A justification of data reliability and validity was highlighted in the chapter. Chapter three also involved the ethical considerations considered in data collection. The researcher presented data using tables, charts and graphs, and data collected through interviews was presented in descriptive writing.

Analysis of data was done in reference to publications by other scholars and authors to the same study wherever possible. Research findings in South East Toyota Pvt Ltd proved that the standard costing system in place was to ensure effective cost control and increase the ability of the firm to maximise profitability.

It was also established that when there is a problem in the implementation of the costing system, the objective of profit maximisation through cost reduction would not be achieved. With the case study company, poor implementation of standard costing system contributed to the cost increases from to , which resulted in the incurrence of losses for those periods.

Ultimately, the researcher found out that for the company to achieve cost control, it has to appropriately implement standard costing system. This means that management have the ultimate responsibility of ensuring feasible standard setting, allocating work, coordinating activities and ensuring an efficient report system when standard costing system is under place.

Retrenchment, clientele loss, stunted technological development, poor pricing and incurrence of losses were discovered as the main consequences of cost increases due to cost management challenges. The study also revealed that when the employees are less skilled, they may be challenges in standard costing implementation as there are various skills that are required on the setting, operating and feedback phases.

Poor communication within the entity was also noted as another challenge faced in the implementation of the costing system. Setting up of a standard setting committee that keeps up to date with trends assist in coming up with achievable standards and this cuts on frequent standards revision costs. Monthly management accounts, weekly cost reports and weekly management meetings were also other approaches that were noted during the study. Quarterly performance appraisal and staff training were highlighted as other approaches to effective cost management.

It was realised during the research that effective implementation of standard costing system resulted successful cost control in other companies in foreign economies such as Toyota India, and as such, it can also produce positive results in local companies.

The research also showed that since the costing system was not being effectively implemented, efforts should be made to improve its implementation than to invest resources in introducing a new costing system. The study evidenced that the main cause of costs escalation was the incorrect implementation of the standard costing system in use.

Eventually, the costs increases triggered the company to fail to maximise profitability as evidenced by the incurrence of losses.

The research study conducted was successful since the researcher managed to reveal and assess the challenges being faced by South East Toyota Pvt Ltd in controlling costs regardless of having a standard costing system put in place to control costs.

The researcher categorised the recommendations in the three phases of the cost control using costing systems setting, operational and feedback phase that were noted by Siyanbola et al so that each recommendation can be easily linked to the each phase in the implementation of standard costing system by the company.

Stefanovic et al also postulates that highly efficient coordination of all functions in an entity results in profitability. This committee carries out industry trend analysis so as to come up with standards that can stretch through an operational period. When budgets are being made when all personnel appreciate their relevance in cost control, all departments can provide reliable cost estimates that would encourage the setting of achievable standards.

Malone et al said that when an entity faces high communication costs, the best way to make decisions is through independent decentralized decision makers who are at the ground. When staff is well trained, there will be less fault jobs and the company can save on costs of zero charged jobs.

Horngren et al believes that management should train employees so that their efficiency in doing work is enhanced. Bhimani et al outlined that resource allocation is a fundamental duty of management since it has an impact on organisational success.

Limiting frequency of routine wastage checks can save on additional expenditure of an entity Periasamy, Kaplan and Atkinson noted that communication channels have a bearing on performance level of a company. Management should educate its employees on the importance of performance evaluations in line with cost management and communicate its view on the results of the appraisals back to the employees.

Further research may also be carried out on the effects of business combinations to cost management as the legal relationship of the entity with the holding company affected the management of operations at the entity. Anderson, S. Badem, C. Becker, J. Bhimani, A. Bazley, M. Blaxter, L. Bryman, A. Christensen, L. Cronholm, S. Cunningham, B. Information for business decisions, 2nd Edition, Cengage Learning Australia. Datar, S.

Daniels, J. Denscombe, M. De Waal, A. Drury, C. Flick, U. Girden, E. Galbraith, J. Hair Jr, J. Hanfy, F. Hansen, D. South-Western Cengage Learning.

Harwell, M. Pursuing ideas as the keystone of exemplary inquiry, 2nd Edition, Sage Publications, Inc. Accessed on Heyvaert, M. Definition, Framework and Potential, Springer Education. Heizer, J. Horngren, C.

M, Rajan, M. Jordan, J. Kaplan, R. Kimmel, P. Klychova, G. Lamen, W. Laurie, M. New Delhi. Long Ho, K. Malone, T. Control, decision making, and IT, Sloan management review, Vol. Marie, A. Mitchell, M. Ngozi, O. Periasamy, P.

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