Standard Cost Accounting System as an Aid to Management Control and Planning

Standard Cost Accounting System as an Aid to Management Control and Planning

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Chapter one on Standard Cost Accounting System as an Aid to Management Control and Planning

INTRODUCTION

Background of the Study

Every organization is in business either to make profit or to cover its cost of production or to render services. Profit is the excess of revenue over cost or expenditure.  Company executives have control over the selling price and therefore have focus attention on cost.  The executive is presented with periodic report of what the actual costs were and this have appraised in order to decide whether cost are higher or lower than the expected or about right.  If costs are higher than expected, they want to know the reason in order to take corrective against future reoccurrence and if cost are lower, they will want to know the reason why, in order to take action that will perpetuate such cost savings.  However, to decide whether cost are higher or lower, that must be a yardstick.  This yardstick is what costs ae expected to be a comparison of actual cost with the yardstick must be made.  This yardstick is the standard we are expected to achieve and therefore called STANDARD COST. This idea of yardstick is the technique applied nearly by 85% of organization in manufacturing sector.

As a result, the management foreman, supervisor and employee become cost conscious, a circumstance that in-turn intend to reduce and encourages the optimum allocation of scarce resources.

Standard Cost Accounting as a management technique can be to have stared long ago.  Although it might not have been the practiced now because of modernization.  Traders made projections with regards to these resources before embarking on their business transaction which is exactly what standard costing system set to achieve, though in a more scientific advancement in industrial resolution, management has gone a long way in setting dependable accounting standard to achieve overall organization goals, management is able to achieve effective and efficient planning and controlling of cost towards realizing organization goals.  This study focuses solely on the manufacturing sector of the economy.  Manufacturing sector is an important institution of the economy and their role may be categorized into two major aspects.

1.   The real manufacturing of goods needed by the society.

2.  The sales of these goods to the society.

This study is focusing on these two functions as to row the manufacturing sector has been able to achieve standard performances.  It also studies how standard are being achieved in view of the current economic depression in the country. Standard costing can be defined as a predetermined calculation of how much cost should be under specific working condition.  It is built from an assessment of the value of material, labour and other cost components are rate expected to apply during the period in which standard cost is intended to be used. Its main purposes are to provide basis for control through variance analysis, for the valuation of stock and work in progress and in some cases for fixed selling prices (T Lucey 1999). The main points in the definition are:

Standard Cost is a predetermined calculation of what ought to be under specific working condition. Standard cost is built up by correcting standard quantity (of machine time, labour time and material) and forecast of future market trend for price standard (price of material wages rate, machine cost per hour etc.)

–    Standard Cost provides basis for control through variance accounting.

–    Standard Cost provides basis for valuation of stock and work in progress and in some cases, for fixed selling prices.

Basically, there are two groups of standards.

i.  Quantity standard

ii.   Prices standard.

Quantity standards are set on the basis of forecast of market trends.  It is important to note that quantity, standard should not be revised frequently while price standard essentially require a frequently while price standard essentially require a periodical revision.

Variance accounting refers to difference between the standard sets and the actual result in a given period.   Variance enable the management to know which element or component of costs that is not efficiently controlled during production.  As a result, step can be taken to ensure an improvement where the result is favourable or institute more control where the result is unfavourable.

However, every activity and operation of an organization involves cost. It must be emphasized, that the existence of a sound well organized basic costing system is fundamental to whatever use is made of the information whether for routine cost ascertainment purposes or for a one – off decision.

Decisions depend on financial factors therefore it is of utmost importance that proper costing methods and techniques suitable for an organization operation to be ascertained, adopted and operated effectively and religiously throughout the organizations` process and operations. In essence, organization are established for a defined purpose which objective can only be seen or shown to the world by the output (product) it produces. For there to be an output the most necessary is the input. Inputs do not come for free; payments have to be made on them. Taking the Nigerian Bottling Company (NBC) as a case study, it needs inputs in the form of raw materials, labour etc. to produce goods (soft drink) and payment must be made for these inputs, this boils down to cost.

Statement of The Problem

In the past, many companies have witnessed considerable lapses and increasing changes in management disciplines. Costing an important element in the overall operation of an organization through the provision of relevant information about cost is one of the problems organizations are facing. Because there are no satisfactory requirements to maintain detailed cost records, some small firms keep only traditional financial accounts and prepare cost information in an ad-hoc-fashion. In all but small firms this approach is likely to be unsatisfactory. There is a vast range of systems in operation ranging from simple analysis to computer based accounting systems incorporating standards, variance analysis and the automatic production of control and operating statements. These different costing methods are meant to suit different organization the adaptation of the wrong method, for a company will constitute a problem instead of a solution. Also poor or inadequate knowledge of a particular method of costing has constituted problems for many firms. Most companies are still using the simple analysis system to set cost while some companies do not even have a costing system. This no doubt has led to poor planning, control and decision making.

With  the ever increasing complexity of business and dynamic conditions of the business environment, makes it difficult: for a company to consistently earn profit that entails fair returns.  Management has to be a plan of action for the business if its profits are to be protected.  There are some problems management face both internal and external that warrant them to have a standard management control and planning systems to tackle these problems.

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