STANDARD-BASED COSTING AND PERFORMANCE MEASURES FOR TODAY'S MANUFACTURING ENVIRONMENT
This paper outlines the various defect of the standard-based costing method and how they do not effectively measure manufacturing environment of today. It has 8 sources in Turabian style.
Cost control is needed by businesses to plan the actual cost it might incur on the production of certain commodities. The budget is an overall costing system but sub-division is needed if and when the company requires detailed cost structure of the department. This is necessary for achieving the overall goals of the organization.
In production organizations, such as manufacturing companies, the basic concern of the management is to have smooth operations with the least cost possible. There the existence of cost is measured by the tangible output each component of the department produces. Income is compared to the cost incurred. A system that is set for measuring the performance level of the tangible assets is known as a standard-based cost. The production level is measured periodically and compared with the actual costs incurred. Any deviation from the original cost is considered as variance and hence they are measured separately. However, the overall costing structure is dependent on the standard costing method. Performance is also evaluated on this basis. In the recent years the structure of the manufacturing environment have changed the way management view standard costs. Since most of the work is performed on a large scale and depend on highly innovative technology, many argue that the concept of standard costing has become redundant and ineffective. The following will analyze this concept.
STANDARD-BASED COSTING IN MANUFACTURING
In standard-based costing system, the primary objective of the cost reporting is to gain optimum level of output from a designated resource. In current manufacturing environment, the cost of set up, hiring specialized skills and to the time to learn the machinery is becoming customary practice. Furthermore, manufacturing today is subjected to high level of quality control, timely delivery and lead time along with competitive price. Standard costing reporting require that every step of the manufacturing process be active discounting time for consideration and planning of production process [Davies, 1997, 52].
Furthermore the inventory measurement method have also changed in the recent years. As machines become high-developed technology wise, one expects the lead-time for transferring the goods to the customer to have increased as well. This is because the larger a batch of product, the longer it takes to reach the market. WIP therefore also increases. Hence, the manufacturing organization have to plan its inventory buffer stock to cover the gap of the lead time lag. This stock cannot be counted in a standard costing system because it does not reach the customer as and when they are required but only when there is a gap in the intermediary delivery time [Davies, 1997, 52].
Critics also offer the argument that manufacturing capacity of businesses have increased over the years because more then half its operational cost is based on integrated and collaborative servicing. For instance the manufacturing organization depend on its marketing partner to launch its products and hence increase the level of sales. Its manufacturing target is also dependent on the level of cost it incurs on marketing tactics. Such a system that is dependent on external forces for capacity increment of machines and labor cannot be accommodated in the standard costing system. It require a more flexible accounting system that would allow it the flexibility of including other constituents of the business as part of the manufacturing processes [Davies, 1997, 52]. Flexibility is required especially if the business wants to expand its capacity by using different combination of its machinery and labor to get the optimum level of production. For instance switching machines, sorting through problems and dealing with rush orders all require a flexible accounting system of the cost involved.
Standard-based costing allows the business to plan its cost according to the level that favors the management in optimal usage of resources and minimum cost price. There are two types of standard that could be used to measure. One is ideal standard where the price is planned to the minimum compared to manufacturing capacity. Second attainable standard where the overall lowest price is noted for costing and a considerable level of efficiency is noted. The costing system does not expect 100% capacity but it does try to minimize spoilage percentage. Thirdly, direct material and labor standards where per unit material and labor is noted for production of per unit of the product. Through these methods it is clear that the standard-based costing system is not usually attainable and hence subject to criticism. The reason being that direct labor and direct material cannot be accounted for if the products are lying idle at warehouses in case of emergencies. Furthermore, labor working on planning production, budgeting and innovating production process cannot be accounted for and does not tally with the material used. Therefore the cost of the standards tend to increase creating discrepancy. While the trend of the current manufacturing environment lean towards careful analysis and implementation of new technology. The introduction of new software or a computerized system in the production department is important for the overall improvement of the department. They must account for learning curve. This cannot be accounted for in standard costing.
Critics in this regard are of the opinion that scientific management principles upon which standard costing has been-based is no longer valid in today's manufacturing environment. Production process in today's production system is divided into multiple process where the simple repetitive task is focused on to give the optimum output. At times the repetition work on a conveyor belt cannot account for the time and material used but they do generate specialization of tasks and hence increase productivity of individual worker. Their outcome could be used for measuring the financial performance. The standards of performance used in the study of scientific management gave rise to the modern management theory which require optimum human resource develop for high level of output. In standard costing the cost of human resources is based on the time spent working. However, the learning curve in such a process cannot be accounted for and hence inadvertently increase managerial cost whereas management spend much of the time on production efficiency. The monetary value is assigned to the standards and the deviation from the standards meaning variance is taken into consideration for designated tasks.
Today most companies operating environment depends on strategies. These strategies are more organizational objective oriented and on serving the customers then merely on the individual requirements of the manufacturing department like lead times and delivery times. Hence unit costs become subsidiary to the overall sales target. To help the management to achieve the main objective, management has to create a flexible costing system that would accommodate the pricing, customers, and the overall organizational objective to provide for quality service. Hence, costing as prescribed in standard costing act adversely to technological development and technology-based organizations.
Furthermore, standard costing is usually-based efficiency variance where the focus of measurement component is labor hours and labor unit. It also has machine capacity standard, which enable the management to measure the performance of the manufacturing department. In the newer manufacturing environment the standard hour is not applied on the machine itself and each labor does not need to spend so much time on the machine in order to produce the desired quantity. The fixed overhead cost therefore becomes flexible because the expenditure in terms of labor and machine increases depending on the quantity demanded. Management maybe motivated to add stock to inventory but they don't need to limit themselves to the capacity set by the budget. Hence at times the fixed cost as compared to the variance cost becomes variable and hence tends to increase the budgetary fixation. This concept is usually promoted by the just-in-time [JIT] production manufacturing method where the cost is based on the season, occasion and the event of demand not over a period of time. They depend on the cost plus pricing of the commodity unit.
Setting of a selling price furthermore depends on the prevailing market price. Standard costing cannot be used as the-based for measuring the performance of a company because the market is so competitive. Companies need to follow the pricing trend by cutting down their costs instead of basing the price on cost of the unit commodity. Hence, the technology that has been used to improve the costing technique has also improved the way management set price for its commodities. This in turn have changed the concept of producing within cost dimension as opposed to producing in the selling price dimension. The total unit cost is determined when there is low external force acting on the production department [Lucas, 1997, 32].
Another aspect of costing depends on the cost of information. The use of the Internet as well as other information system in the company has become a major contribution to the decision-making process. For example the emergence…
"Standard-Based Costing And Performance Measures For Today's Manufacturing Environment" (2002, October 04) Retrieved August 20, 2017, from https://www.paperdue.com/essay/standard-based-costing-and-performance-measures-136017
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"Standard-Based Costing And Performance Measures For Today's Manufacturing Environment", 04 October 2002, Accessed.20 August. 2017, https://www.paperdue.com/essay/standard-based-costing-and-performance-measures-136017