Accounting and Finance

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Introduction

The discussion in this essay is related to the issue of management accounting practices. Accounting and Finance Furthermore, the discussion is also related to the critical analysis about the use and application of the management accounting system along with the use and application of the standard costing and variance analysis and their importance for the organization in the modern times.  The discussion has further gone on to discuss in detail the benefits and the drawbacks that are associated with the standard costing and variance analysis system

a) Relevance of standard costing and variance analysis

According to the literature of Drury (2013), standard costing refers to the practice of replacing the expected cost for an actual cost in the records related to the accounts of the organization. Variance analysis refers to the analysis and recording of any differences between the expected and the actual costs (Garrison, Noreen, Brewer and McGowan, 2010). According to Rao and Bargerstock (2011), standard costing was established to match the needs and requirements of manufacturing at a large scale Accounting and Finance.

It is further stated that the production on a large scale is primarily concerned with the large amount of investment which requires affective costing techniques. Accounting and Finance In the view of Kaplan and Atkinson (2015), standard costing system is beneficial in the case of the manufacturing of single product. However, in the case of lean manufacturing where more than one product is produced through a single process, the use of standard costing in such a case can generate reports which are difficult to analyze as they are expected to contain high volume of variance.

As stated by Chiarini (2012), standard cost is best suited to the organization that is involved in conducting repetitive activities. This kind of costing method cannot be applied to the manufacturing organization that does not perform repetitive activities. However, it has also been argued that the development of the effective standard costing technique ensures that the favorable organizational environment is created in terms of the cost control and profit maximization.

In the opinion of Sulaiman, Nazli Nik, Ahmad and Mohd Alwi (2005), the use of the standard costing technique is expected to contradict with the modern business needs and requirements due to the fact that it generally takes lot of time and resources of the organization. It is also argued that if the standard that has been set in this case is obsolete and outdated then any comparison against this standard will lead towards the reduction of the overall quality of the organization.

Standard costing is also seen as a rigid tool by some of the policy makers of the organization as the reduction in the cost is viewed as decline in the overall quality, externalization of the cost along with the ignorance of the needs and requirements of the customers with respect to quality. The Accounting and Finance technique may also be detrimental for use in the JIT system which calls for continuous improvement and sufficient investment to achieve the improvement (Al-Omiri and Drury, 2007).

The relevance of standard costing and variance analysis is also reduced in the modern business environment due to the decrease in the labor intensive manufacturing processes; therefore, the standard costing system that is designed to monitor the activities of the labor may also become outdated and useless for the organization (CIMA Global, 2015). It has been further highlighted that the tool of standard costing is primarily used by the traditional organizations as the organizations operating on the basis of the modern competitive and business environment have diverted from the use of this costing system.

However, according to the study of Sulaiman, Nazli Nik, Ahmad and Mohd Alwi (2005), many firms in Malaysia and Japan are content to use this costing method as they believe that the basic principles of this costing technique are valid even in the modern business environment. One of the other drawbacks because of which the adoption of the standard costing technique is not preferred by the organization is its reactive nature.

As this kind of costing technique is primarily suited for the standardized method of production; therefore, it is not suitable for the organizations competing at a global level and facing intense competition as they have to be proactive in meeting the customer needs and wants something, which is difficult to achieve through the process of standard costing.

b) Arguments in favor of the relevance of standard costing and variance analysis

Although the standard costing and variance analysis technique has become obsolete to a certain extent in the current business environment, but the costing technique still holds significant importance for many industries around the globe. One of the major benefits that are associated with the use of the standard costing procedure is that it has the ability to detect and identify any variances in the manufacturing process and can work towards suggesting the appropriate measures.

In the opinion of Garrison, Noreen, Brewer and McGowan (2010), the development of the effective standard in terms of costing is helpful in the creation of the effective business environment although the creation of the effective business environment is largely dependent upon factors out of which standard method of costing is one of them. The benefit related to the development of the organizational culture is also highlighted in the literature of Horngren (2009), in which the authors describe the importance of cost conscious culture within the ranks of the organization which is generally achieved through the implementation of standard costing and variance analysis tool and technique.

It has been further argued that the effective implementation of the standard costing tool is advantageous when all the stakeholders and their activities along with their needs and requirements are dealt with in accordance to the standard and fixed procedure (Healy and Palepu, 2012). One of the key aspects that are related to increase in the use of the standard costing method is the nature of the cost that is incurred. If the cost that is incurred by the organization stays within the standard then the standard costing and the variance analysis will assist the management to focus on other relevant issue.

The one major argument against all these benefits is that this costing technique is considered as rigid method costing which cannot be adapted in the light of the changing environment. The dynamic environment of the business around the globe calls for the use of the techniques and the strategies that can meet the ever changing circumstances of the business (Flamholtz, 2012).

c) Analysis of the discussion

The discussion that has been conducted above related to the advantages and disadvantages of standard costing and variance analysis has highlighted certain aspects that are integral in the effective implementation of this technique. The discussion has primarily been in the favor of the views and opinions of Johnson and Kaplanâ as they criticized the use of the standard costing and variance analysis technique.

The major portion of the discussion highlighted that the standard costing system is an outdated technique which is unable to keep pace with the requirements of modern business. As this technique is primarily a reactive technique rather than a proactive technique; therefore, it can be concluded that the statement made by Johnson and Kaplana is still quite valid.

Further validity of their statements are also highlighted through the fact that trend of globalization has increased the intensity of the competition that is being faced by the organizations around the globe as highlighted by Chiarini (2012) in the above discussion. The trend of globalization calls for the organization to involve in offering customized products and services to their customers.

The disruptions that can be caused in the manufacturing process of the organization as a result of these customized activities cannot be properly taken into account through standard costing and variance analysis technique. However, the statements of Johnson and Kaplana have not taken into account certain advantages of this costing method.

Some of the key benefits related to standardize costing have been ignored in their analysis such as development of the cost conscious culture within the organization along with the establishment of the standardized structure within the organization that enables the employees to effectively carry out their duties and responsibilities. The other major benefit that can be taken into consideration related to this costing technique is the element of consistency with which it operates and the benefits that it can provide to the organizations producing standardized level of output as it was highlighted above in the opinion of (Healy and Palepu, 2012)….