A report on the Implementation of Standard Costing

A report on the Implementation of cadenceworn approachIn modern years, various irradiations such as activity-establish be, the balanced bill of uttermoste and bulls eye be have been go ford in the business comm building blocky. However, handed-downistic wariness method of ac waiting governing bodys continue to be widely applied. nonp atomic number 18il font is amount be, which has been utilize on a wide front during the fit century.The dissolve of this newspaper is to examine the widely go for of cadence be arrangement. Despite it is less relevant than newer method of accounting methods, hackneyed be is far from obsolete. Because of its simplicity, flexibility and afford efficiency, shopworn constitute remains a favorite equal accounting method among accounting and finance professionals.IntroductionIn like a shots fourth dimension of rapid technologic change, tough global and domestic competition, sum monetary value focvictimization is central t o sustained corporate realizeability and competitiveness. The worry focus today is to minimize price. The cost leadership strategy does not mean compromise on either quality or technology or product unlikeiation. Low be be no reward, if the customers argon not voluntary to buy the product of low cost firm. Cost management has to be driven with customer as the focus.The survival r divulgee for any political party is how to manage its product/ serve up cost, quality and cognitive operation. The customers be continuously demanding high-pitched quality and interrupt performance products/ serve wells and at the equivalent time, they need the sets to f each. The sh beholders be in like manner demanding a required rate of return on their investment with the company. Thus, cost has become a residual. The challenge is being fit to manufacture or raise service with the stipulated cost frame race. Thus, cost management has to be an ongoing continuous improvement program.S tandard costIn recent years, various tools such as activity-based cost, the balanced scorecard and target be have been used in the business community (Ka device Cooper, 1998 Kaplan Norton, 1996 Ansari et al1997). However, traditional management accounting systems continue to be widely applied (Brewer, 2000).One example of traditional management accounting is mensuration be. Standards can be used with either job order or c be for cost system to provide authoritative info for managerial planning, ruleling, and decision making. Standard be assists in setting budgets and evaluating managerial performance. The major motive to use amount be is because it facilitates product cost estimation (Ask Ax, 1997). Ask and Axs write up is supported by a study conducted by Puxty and Lyall (1989), which reported that 76 percent of the UK commercial and industrial companies operate a amount cost system.Although it is used widely, people recently criticize it could not provide the data needed in todays competitive environment. Despite the criticism, there are few signs that the use of normal costing tends to decrease. The survey from Ask and AX (1997) showed that 12.6 % of the companies investigated declared that they would abandon standards save on the other hand, 9.9 % say that they would like to replace to standard costing system.The History of Standard CostingThe standard costing system was developed in the early 1900s. correspond to Drury (1992), it was the scientific management principles recommended by F.W. Taylor and other engineers. Scientific engineers built up information approximately standards to set up the best way to use labour and satisfying resources at heart manufacturing. Engineers used the standards to provide information for planning the flow of work so that the waste of materials and labour was minimized. Interestingly, engineers did not consider standards as a tool to control financial be at that time (Drury, 1992)The stolon thoug hts of using standards as a tool to control cost came from G. affiance Harrison, who designed the first standard costing system. Started in 1911, Harrison worked for the Boss Manufacturing Company, Illinois, in USA makers of work gloves. It took him a few years before he published the first set of equations for the depth psychology of cost variablenesss (Solomons, 1968)Harrison was not the scarcely person on the standard costing scene. In 1908 and 1909 Harrington Emerson supported the organic evolution of an information system specifically directed towards the achievement of aptitude objectives. Emerson stated that information closely standards allow managers to antitheticaliate divisions that are due to manageable conditions and variants that are caused by conditions beyond managements control (Solomons, 1968)Traditionally standard costing systems are used in order to support the manufacturing industry. Today standard costing is widely used by all kinds of industries.The Purpose of A Standard Costing trunkThe purpose of cost and management accounting is to provide financial information to managers to divine service them to plan activities, control the activities and travel to the financial implications of any decisions they make take (Hussey Hussey, 1998). Standard costing systems provide cost entropy that can be used for many different purposes.Ask and AX (1997) have identified several fields of employment when it comes to a standard costing system. Their survey has the following reasons/purposes why a company may use a standard costing systemProduct Costing 82.4%Inventory Valuation 64.8%Variance Analysis 56.0%Budgeting 45.1% permute Pricing 31.9%Drury (1996) gives a wider view of the purposes. He states that the main purpose a standard costing system can be used areTo assist in setting budges and evaluating managerial performance.To act as a control device by stressing those activities which do not match to plan and thus alert decision-ma kers to those office staffs that many be out of control and in need of remedial action.To provide a forecast of future be that can be used for decision making purposes.To simplify the line of work of tracing cost to products for ancestry evaluation purposes.To provide a ambitious target with individuals are motivated to achieve.There are many advantages with standards. Calculations are easier made and an effective performance controls are enabled, which provide opportunity to savings. refresh Against Standard Costing system of rulessStandard cost are major elements within the management accounting airfield. They were used when organizations conditions were stable, standardized products were produced and labour and material costs were the major costs components. But todays business environment is different.The difficulties in the manufacturing military operation are increased when products are many and product series are miserable. (Ask Ax, 1997) When difficulties increase, it has more complicated interpreting of dissonances. Moreover, it could be difficult to tie the departures to the special persons or the particular areas.Also, when the manufacturing conditions become more complex, the amount of mend costs increases. Therefore, fewer opportunities will learn the broad(a) costs in the short term. Managers have less interesting to manage by using traditional thinking on how costs are influenced by chroma.As shown above, standards may be difficult to set in todays dynamic conditions. A standard costing system may be expensive to maintain and the spare record-keeping may become a burden to managers and they lose confidence in the system. (Hussey Hussey, 1997)Richard Fleischman and Thomas Tyson claimed that standard costing cannot provide adequate assistance in the areas of construction strategy and operational management. (Fleischman and Tyson, 1998) Don Hansen and Maryanne Mowen describe standard costing system as potentially dysfunctional. ( Hansen and Mowen, 2002) These criticisms have contributed to the dismissal of standard costing, specially for large companies that have more sophisticated method such as Activity Based Costing (ABC) and target costing. Mike Lucas even questioned that whether it is silent appropriate for college accounting programs to t to to severally one one this topic. (Lucas, 1997)Global Acceptance of Standard CostingWhile academics pointing out the weaknesses of standard costing, people observed that this accounting tool continues to be widely used throughout the world. Studies showed that in developed countries the standard costing using rate is as high as 73% in the U.K. and 86% in Japan. (Garg, Ghosh, Hudick and Nowacki, 2003)More specifically76% of 303 accountants in the U.K. and 73% of 85 finance and accounting specialists in New Zealand use standard costing. (Guilding, Lamminmaki and Drury, 1998) The authors also effect that accountants viewed modern costing and production management tools as having no stupor on how widely standard costing and variance analysis are used. A study by Maliah Sulaiman, Nik Nazli and Norhayati Mohd Alwi of companies doing business in Malaysia found homogeneous widespread dissemination and persistence of standard costing 70% of 66 local firms and 76% of 21 Japanese are using standard costing.These studies reveal that standard costing does not overemphasize cost control however, it is linked to quality management. In addition, the Lucas and Sulaiman studies have shown that companies use historic performance instead of pre retrieved applied science standards on actual costs. quite of using newer and costlier systems, companies chose to reconfigure existing system with more precise schemes, implying that firms have capable standard costing to their specific require and have not decrepit it.Swiss Chalet Standard Costs SystemSystem DescriptionIn order to demonstrate that standard costing is far from obsolete. I examined the standar d costing system at Swiss Chalet, one of the biggest Canadian restaurant chains. The collected data of this study consists of in-depth interviews with employees working with standard costing at different divisions within Swiss Chalet. The study about the standard costing in U.K., Dubai and Malaysia is also used.First opened in 1954, Swiss Chalet at one time has more than 190 restaurants across Canada and United States serving their signature rotisserie cowardly and a variety of other menu items.In the beginning of separately month, Swiss Chalets area manger will send standard costs to each Swiss Chalets store. The standard costs are generated through historic data and area managers analysis based on each stores current situation. Then, management in each store can project materials, wear down and overhead costs by polishing the standard costs established for each of these cost elements. Then electronic calculator generate the variances and make managers recognize the differ ences mingled with the actual activities and resource consumption and the expected activities and resource consumption. When the variance is significant, this is a signal for investigation, Managers will try to discover the cause and maintain influence to correct it.Therefore, cost control and performance evaluation is the main purpose of Swiss Chalets Standard Costing System. According to Mann-Whitney U test Statistic13, inventory costing is the key function of standard costing for industries in U.K, Dubai and Malaysia. Also, Mann-Whitney U test suggests that the industrial- sphere of influence companies in U.K. use standard costing to a greater extent than the service heavens for the functions of cost control and performance evaluation, costing inventories and computing product cost for decision making. Also, in only one instance has this pattern reverted toward the service orbit the use of standard costing as an aid to budgeting. These findings are lucid with those of other studies of industrial sector companies in Malaysia and the U.K. (Marie Rao, 2010)Material StandardsSwiss Chalets direct material components have one-third categories foods, liquor and disposals. Foods embroil chicken, potatoes, ribs, and vegetables. Etc. Liquor includes wine, spirit and other non-alcohol beverages. Disposals include food boxes and bags to wrap food. Also, the standard cost of non-value-added materials such as throw out materials, food wastes and voidable orders are also included for the purpose of reduction or elimination. When area mangers determine the standard cost, historical cost, stores current performance and cost-benefit trade-offs are involved in making quality decisions. When all beat and price information has been gathered, component quantities are multiplied by unit prices to yield the summate cost of each component. These totals are summed to determine the total standard material cost of one unit of product and the total standard material cost. I nformation about direct material of each component, their specifications (including quality), their quantities and total standard material cost are listed on a bill of materials.This intermediate of historic usage method is consistent with statistics of service sectors in Dubai, U.K. and Malaysia. According to Mann-Whitney U test Statistic, 76% of service sector in Dubai and 63% of service sector in Malaysia use ordinary of historic usage to set up take and material standards. On the other hand, nearly nine out of 10 industrial sector respondents in Dubai employed standards based on design/engineering studies, which is comparable to(predicate) to Japanese companies in Malaysia (81%). These firms appear to be significantly more scientific in their approach to standards setting compared to the service sectors, which predominantly used average of historic usage method. repulse StandardsThe procedures for developing labor standards are similar to those used for material standards in Swiss Chalet. Swiss Chalet has four signs of working in the front of the house servers, hosts, managers and bar tenders. They also have tether types of people in the kitchen cooks, line cooks and pre cooks. The standard costs of each type of worker in each specific time range are identified. Because they are in the restaurant business, labor requirement is different during the different peak of the day. Therefore, their labor standards are specifically identified in each hour. Their managers salaries are also counted into the labor standard costs although they are better overhead cost. Labor rate standards reflect the earningss and fringe benefits remunerative to employees. Because employees in the same position are paid different wage rates based on their experiences in the restaurant business, a burthen average rate is computed and used as the standard. After labor tasks are analyzed, an operations flow document is alert that lists all the needful activities and labor c osts in each time range.Overhead StandardsSwiss Chalet store has two types of overhead costs utility costs and maintenance costs. (Managers salaries are included in the labor costs). Utility costs include rent, botch and hydro, etc. Maintenance costs include equipment repair budget, sanitary service and pest controls, etc. Area managers use historical data, store situation and market price to determine the overhead standard costs.Swiss Chalets managers review the standard every month. Slightly more than half of Dubai industries (52%) conduct reviews semiannually, consistent with Japanese respondents in Malaysia (55%). On the other hand, domestic Malaysia firms in the U.K. were ingenious to review their costing standards annually at a rate of 35% and 68%, respectively. (Marie Rao, 2010)Material VarianceStore managers do the inventory count every week and then input direct material cost they used of each component, their specifications (including quality), their quantities and tot al standard material cost into the computer system. The computer system generates the price variance and quantity variance.Store managers ordinarily can not do much about the price variance because they are not able to control prices. Head office has buy contracts with their suppliers with fixed prices in the yearly basis. The only price they can control is vegetable prices, which have seasonal fluctuation. Managers are able to influence the price according to the price variance.Quantity variances are considered the responsibility of the person in charge of the kitchen. When the quantity variance is too big, managers have to think about the efficiency of the material usage, weather experienced employees are well allocated in different shift and weather further training should be provided.Labor VarianceWhen employees start to work and when they leave the store, they input their password into the computer system. Computer system automatically records their working hours and generate s labor rate variance and labor efficiency variance.If the labor cost is bigger than 29% of the total costs, head office will give a warning to the stores, demanding them to tighten up the labor costs. Therefore, managers have to balance the use of experienced workers and inexperienced workers in a specific task by using labor efficiency variance and labor rate variance. Using highly skilled highly paid individuals for lower-level jobs could cause an unfavorable labor rate variance, accompanied by a favorable labor efficiency variance.Therefore, Swiss Chalet examines variance where the variance exceeds a given percentage of standard. In Dubai, 39% of industrial companies and 50% of service companies base their costing decisions on managerial judgment, compared to roughly half of U.K. companies and one fourth of local and Japanese companies in Malaysia. However, 35% of firms in Dubais industrial sector and 29% in its service sector answered when the variance exceeded a given percent age of standard, which is similar to the rates found in the Malaysia and U.K. studies. (Marie Rao, 2010)II Usefulness and effectiveness of the SystemThe major advantage of standard cost system in Swiss Chalet is that it highlights and allows management to manage by exceptions, that is, it allows management to concentrate on the areas where there are inefficiencies. It also allows company management to understand the quality expected and costs that will be incurred in the preparation of each dish and what meets deviations from these standards will have on costs and profits. When the variance is significant, this is a signal for investigation, Managers tries to discover the cause and exert influence to correct it. In the Swiss Chalet store I visited, costs are under control productivity is high workers are achieving bonuses based on team activity goals and employee morale is high in a work environment typically viewed as tedious.The system is highly controlled and automated. The pro cess is effective and the standards they set are appropriate and attainably. Although their standards are developed from one-time(prenominal) and current information, environmental, seasonal and economic factors are considered for the period in which the standards are to be applied. Swiss Chalets material, labor and overhead standard costs are changed every month. For example, recently, Swiss Chalet eliminated many non value added labor movements, their labor time standards changed very soon accordingly.Swiss Chalets standards can be reached or slightly exceeded approximately 60% or 70% of the time with sound sudor by workers. Their standards allow for normal, unavoidable time problems or delays. Their standards represent an come-at-able challenge and are able to motivate workers performance and at find out how effectively and cost-efficiently workers are performing their tasks.III Recommendation butt changes chthonic current system, area managers are the only people who do t he standard costs setting. I believe that area managers could cooperate with get manager, accountants, marketing managers and store managers to determine which choices are most appropriate. The cooperation will help the company better balance the interrelationship of cost, quality, quantity and selling price.Under the current system, standard costs of each type of worker in each specific time range are used to target the total labor standards. However, workers salaries are different even in the same position because their experiences are different. Therefore, each individuals salary and individual numbers in one specific time range used to calculate the standard labor costs should be identified for managers better understand the standards and better improve their labor arrangement and improve their labor efficiency.Computer System changeSwiss Chalets current computer system is good, but quench not highly automated. They still use fax to transit data and information within the org anization are not highly dual-lane within one portal. Therefore, I believe Enterprise Resource plan System (ERP) will make their work process more effectively.EPR system provides a much higher level of accuracy to gathering cost information. With most manufacturing processes being automated and operated with little direct labor, ERP system has the advantage of keeping an accurate record of overhead cost pools at all levels in an organization. ERP has greater capacity to accurately allocate costs and it is important for developing accurate standards. Standard costs can be prepared with, for example, the sub-module mySAP.com Financials under ERP system.Intermountain Health Care, Inc.s Standard SystemAccording to Mr. W.V. Rosqvists research paper Intermountain Health Care, Inc, (IHC) Satandard Costing System Methodology and Implementation, the IHC Standard Costing System is able to manipulate the procedure costs in any way desirable to provide meaningful groupings for analysis. The Standard Costing System provides infirmary management with a tool for meeting increased cost pressures in the health deal out environment. The system is useful for determine services, but it is also important to monitor productivity and analyze costs and profitability.IHC is a not-for-profit hospital chain with 22 hospitals in the intermountain area and head office is in Salt Lake City. They have a complex approach to determine slender standard costs for every procedure in the hospital. IHCs standard costing system was designed to link the hospitals financial management and case intermingle reporting system to provide significant information in the area of followingCost/Profit Studies the ability to determine cost and profit at each of levels, such as patient, physician, medical specialty, payer and employer. merchandise to make complex decisions regarding the competitive market forces such as pricing, espial and physician retirement. The analysis gives hospital the advantage to determine the financial impact of changes in volume.Departmental Productivity to monitor the department performance to help variance analysis and goal setting.Utilization of Hospital Service the ability to alter utilization, which depends on the ability to analyze current patterns and associated costs.Cost comparing To compare costs to other hospitals to help managers to identify and learn the efficient methods.Competitive Analysis To study competitor information and make reasonable judgment of its costs. It will allow a significant view of the impact of price completion on all the competitors. It will help IHC to determine the extent to which it should compete on prices with other hospitals and with nontraditional health care providers, such as outpatient surgery centers.The IHC approach to standard costing provides exact costs for every individual charge item in the hospital. obstinate and variable costs are maintained for every item in broad categories labor expense, supply expense, depreciation and hospital overhead.After the implementation, their standard costing system is able to provide full standard fixed and variable costs for management purpose in making pricing and marketing decisions maintain a management reporting system harmonious with existing system provide an approach to compare hospitals and departments provide accuracy while allowing easy and rapid maintenance. (M. V. Rosqvist)The Future of Standard CostingAccording to Cheatham and Cheatham (1996), many accountants do not know that a redesigned standard costing system can provide the important information that they need and update their system is an easier process than adopting a new system. They also point out that standard costing system combines managerial, financial and operations accounting, which make it as a control system. But the possible replacement is only cost accumulation system.Critics against the standard costing system questioned whether the system is useful in the man ufacturing system of today. As we demonstrated above, it is still a widely used method, due to the fact that it provides cost information for many different slipway in addition to cost control. A lot of companies accommodateed their standard costing system to report on these variables that particularly important to them. In companies where an activity-based system is implemented, standard costing is still essential when it comes to controlling the costs of unit-level activities.Other criticism comes from that overemphasis is on the price and efficiency, which would make quality aside. Also, volume variance to measure utilization of capacity ignores overproduction and unnecessary build-up of inventory. In this situation the fact that variance analysis is not locked in to a set of variables is ignored. Used variables can be changed when the need arises. Examples of this are presented below. (Cheatham Cheatham, 1996)To use standards on the functions of raw material ordering and inve ntory levels, which give information about the effectiveness of suppliers. Because the objective is to deliver orders as placed, any variances are undesired.Price variances can be combined with a quality variance to prevent purchasing managers from only focusing on price but do not pay attention to quality.Raw materials inventory variances presage an inventory build-up, because more material purchased than used, by reverted conditions. This is in line with a just-in-time theory.Further criticism is about the non-focus of continuous improvement. But, standards based on engineering studies or historical data are not a necessary part of a standard costing system because standards can be changed by a lot of methods. Examples are listed as below. (Cheatham Cheatham, 1996)Use stand up periods results as standards. The last periods result has to be representative otherwise it needs to be revised. It is also achievable to use a base period that comparisons are made.Use benchmark as somet hing outside companies. To compare with competitors or with the leader of the industry.Use regulate cost reduction by bring down the standard cost for every period by a predetermined amount to achieve constant improvement.Finally, the reporting system of the standard costing system may be revised. In the traditional way intragroup completion often arises. By revising the reporting system, cooperation among workers, managers and departments can be supported.ConclusionDespite it is less relevant than newer accounting methods, standard costing is far from obsolete. However, redesign and update the standard costing system to adapt the new environment may be necessary. Because of its simplicity, flexibility and affordability, standard costing remains a favorite cost accounting method among accounting and finance professionals.