Accounting and Finance

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Accounting and Finance (Ref No: 1383)

Table of Contents

Introduction. 

1. a) Relevance of standard costing and variance analysis. 
2. b) Arguments in favor of the relevance of standard costing and variance analysis.
3. c) Analysis of the discussion.

Conclusion.

References.

Introduction

The discussion in this essay is related to the issue of management accounting practices. 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), accounting and finance 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.

It is further stated that the production on a large scale is primarily concerned with the large amount of investment which requires effective costing techniques. In the view of Kaplan and Atkinson (2015), accounting and finance 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 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…