is standard costing still relevant? by haris awang

Is Standard Costing Still Relevant? A Review on Today’s Manufacturing Environment. Asia Metropolitan University. A. HARIS AWANG. 2016.

Is Standard Costing Still Relevant?

A Review on Today’s Manufacturing Environment

Abdul Haris Awang (MBA2016-04-1001)

Submitted to:

Ms. Khairunisa Daud

Faculty of Business,

Asia Metropolitan University

05th Nov, 2016

MBA6053 Managerial Accounting

Abstract

Since the early 80s, standard costing system (SCS) has been criticized as not providing sufficient

information for evolving manufacturers. In spite of that, SCS is still the system preferred by many

in the manufacturing industry. This review aims to discuss the findings by examining journals on

SCS written from 1996 to 2015. At the end, a survey is conducted on a company to test whether

it is consistent with previous findings in which it is found that it is indeed consistent. SCS is still

relevant.

Introduction

Purpose of review

The purpose of this review is to examine whether standard costing system (SCS) is still relevant

after the past two decades by reviewing findings and results from selected journals written during

the period. At the end of the review, a test on an actual manufacturing environment is conducted

2016


to find out whether standard costing is still in use or irrelevant under today’s manufacturing

environment.

Importance of issue/topic

With the advancement of manufacturing technologies and a decreasing emphasis on labor in the

production process, the general perception is that standard costing is becoming less and less

relevant. However, empirical evidence appears to indicate that a large majority of companies are

using standard costing for decision making, control and performance evaluation purposes

(Cornick et al., 1985; Ghosh et al., 1987; Lyall and Graham, 1993; Joshi, 2001).

Sulaiman, Nik Ahmad & Mohd Alwi (2005), in their empirical studies on the obsolescence of

standard costing, find that the majority of Japanese companies in Malaysia are also using

standard costing in their management system.

What is the significance of this? It is so that SCS can be applied and updated along with other

dynamically changing manufacturing systems and included in the syllabus at the educational

level.

Background

In the context of this review, standard costing, wherever applicable, is compared to activity-based

costing (ABC). Standard costing system (SCS) is a form of traditional costing while activity-based

costing is a modern way of costing. In standard costing, the company calculates costs based on

historical data and by predicting future expenses while activity-based costing focuses more on

the current expenditure. The main advantage of standard costing is that it is easier to apply and

it is also compatible to other management technics such as in benchmarking. One of its

weaknesses are that it fails to provide a basis for the diagnosis of all costs. For example, standard

costing is good when a company wants to achieve consistency while ABC is good for a thorough

audit of the organization performance.


Given the perception that companies that are generally ahead in manufacturing technologies such

as Kanban System, JIT, TQC and Kaizen and the fact that standard costing is inconsistent with

the use of such technologies, one would expect standard costing to be used to a lesser extent by

these companies. However, recent studies may prove otherwise.

The following section is a review of the literature followed by a conclusion with the limitations of

the study and suggestions for future research.

Literature Review

The literature review is organized by reviewing journals in chronological order from 1996 to 2015.

Findings

Standard costing system (SCS) has been criticized as not providing the information needed for

advanced manufacturers since the early 80s. However, based on a 1988 survey on U.S.

manufacturers, 86 percent is found to be using SCS. Another survey by Schiff (1993) also

indicates that the vast majority use standard costing. It is also pointed out by the authors that

most companies can benefit from some combination of ABC and SCS where ABC is for indirect

costs and SCS is for direct costs and further concluded that SCS is not the dinosaur of the cost

system but rather a system useful when updated along with other dynamics standards (Cheatham

& Cheatham, 1996).

In an empirical investigation of a comparative analysis of management accounting practices in

Australia and Japan by Wijewardena & De Zoysa (1999), it is initially reported that the relevance

of SCS has declined significantly in previous years as a result in changes occurred in the

manufacturing environment. On the contrary, a survey conducted by the authors shows that SCS

is used 69 percent and 31 percent by Australian and Japanese manufacturers respectively

compared to other cost systems such as actual, absorption and variable. The survey also

indicates that 64 percent of Australian companies made changes to their cost accounting systems


while the corresponding rate for Japanese companies as 92 percent. This supports the opinion

that Japanese manufacturers introduced more timely changes to management accounting

practices than their Australian counterparts.

Sulaiman, Nik Ahmad & Mohd Alwi (2005), in their empirical studies on the obsolescence of

standard costing, find that the majority of Japanese companies in Malaysia are also using

standard costing in their management system. Both Malaysian and Japanese companies perceive

SCS as a solid management accounting system. In the review, the authors also point out that

SCS is less expensive to deploy compared to other costing systems. Additionally, SCS has been

used for both cost control as well as product costing purposes. In a survey conducted by the

authors, SCS is used 76 percent and 70 percent by Japanese and Malaysian manufacturers

respectively. It is also consistent with the findings by Drury et al, (1993) where 76% of the UK

manufacturers use SCS. The high adoption rate can be attributed to the companies’ modified

SCSs in line with the current manufacturing environment.

Based on a research on SCS in Japanese firms by De Zoysa & Herath (2007), SCS is still being

used by a large number of firms both in developing and developed countries despite the criticisms.

Overall, the importance of SCS, as the research suggests, has not declined to such a low level

despite the technological changes. In Japan, SCS is still used for different purposes despite its

apparent weaknesses.

An empirical research by Badem, Ergin & Drury (2013) on the automotive industry in Turkey

reveals that 74 percent of the manufacturers surveyed, primary and suppliers, use SCS. This is

quite consistent with findings by other researchers from other geographical areas such as UK

(Drury et al., 1993), Malaysia (Sulaiman et al., 2005), and Dubai (Marie et al., 2010). The authors

further conclude that SCS continues to be widely used in the Turkish automotive industry. It is

also pointed out that the companies still benefit from the usage of SCS not only for cost control


and performance appraisal analysis but also from the method supply cost information for different

objectives.

A quantitative research conducted by Gauci (2015) finds that SCS and standard variance analysis

are more relevant in medium and large companies rather than in micro and small firms. These

management accounting techniques are still relevant even in a moderate or highly automated

environment. The author further concludes that the majority of users of SCS and standard

variance analysis consider these two management accounting techniques as important or very

important to the company’s ongoing success.

Pattern in findings

From the above findings, it can be summarized that researches on the topic of SCS by Cheatham

& Cheatham (1996), Wijewardena & De Zoysa (1999), Sulaiman et al., (2005), De Zoysa & Herath

(2007), Badem et al., (2013), and Gauci (2015) have come to a conclusion that SCS is relevant

throughout the past two decades.

Implications/importance of findings

The implications of the findings is that SCS is a very profound costing system that is being

practiced in the manufacturing industry throughout the world. It plays an important role in the

success of a manufacturing firm. SCS needs to be further developed in line with the evolving

nature of manufacturing technologies.

Overall own critique

In spite of the findings favoring SCS, most researches are either based on surveys or literature

reviews which is not comprehensive. Moreover, researches are also limited to only certain

countries. Participants may also be subjected to Hawthorne effect in which their behavior is

altered due to their awareness of being observed.


Reality check

As a final review, a survey has been conducted on a Japanese manufacturing company which I

am currently being employed, to test if SCS still has its relevance under the present environment.

A questionnaire similar to the one conducted by Sulaiman et al., (2005) was given to the finance

manager who is the person responsible and knowledgeable about SCS (appendix). The results

are consistent with their findings where SCS is still being used today.

Conclusion

In conclusion, it is found that SCS has been an integral and important part of manufacturing

costing system throughout the past two decades. Until now it still has prominence as a setter for

manufacturing standards.

While the review may be interesting to researchers and practicing managers, it has several

limitations. The review was based on a review of literature. Only a survey sample of one company

was conducted recently to confirm previous findings. Future research should undertake empirical

studies of standard costing practice in geographical areas other than the ones mentioned above

such as Korea, China, EU, middle-east, Africa and South America. For as long as SCS is being

used and remains relevant, an emphasis should be given both in the real business environment

as well as at the academic level.


Reference

Badem, A.C, Ergin, E & Drury, C. (2013). Is Standard Costing Still Used? Evidence from Turkish

Automotive Industry. International Business Research, 6(7), 79-90.

Cheatham, C.B & Cheatham, L.R. (1996). Redesigning Cost Systems: Is Standard Costing

Obsolete? Accounting Horizons, 10(4), 23-31.

De Zoysa, A & Herath, S.K. (2007). Standard Costing in Japanese Firms: Reexamination of its

significance in the new manufacturing environment. Industrial Management and Data

Systems, 107(2), 271-283.

Gauci, A. (2015). The relevance of standard costing and variance analysis in the manufacturing

industry. The University of Malta. https://www.um.edu.mt/library/oar/handle/123456789/8471?show=full

Nuhu, N.A, Baird, K & Appuhami, R. (2016). The Association between the Use of Management

Accounting Practices with Organizational Change and Organizational Performance.

Advances in Management Accounting, 26( ), 67-98.

Sulaiman, M, Nik Ahmad, N.N & Mohd Alwi, N. (2005). Is Standard Costing Obsolete? Empirical

Evidence from Malaysia. Managerial Auditing Journal, 20(2), 109-124.

Wijewardena, H & De Zoysa, A. (1999). A Comparative Analysis of Management Accounting

Practices in Australia and Japan: An Empirical Investigation. The International Journal of

Accounting, 34(1), 49-70.


Appendix

STANDARD COSTING SURVEY 27th October, 2016

0. Does your company use Standard Costing?

X a. Yes

b. No

1. The importance of Standard Costing 1 2 3 4 5

a. Cost control and performance evaluation X

b. Costing inventories X

c. Computing product cost for decision making X

d. As an aid to budgeting X

e. Data processing economies X

2. Methods used to set labor & material standards 1 2 3 4 5

a. Standards based on design/engineering studies X

b. Observations based on trial runs X

c. Work study techniques X

d. Average of historic usage X

3. Type of standards employed by your company's

Standard Costing system 1 2 3 4 5

a. Maximum efficiency standards X

b. Achievable but difficult to attain standards X

c. Average past performance standards X

d. Others X

4. How frequent are standards costs formally reviewed?

(Choose one answer)

a. Monthly or quarterly

X b. Semi-annually

c. Continuously

d. When the variances imply that the standards have changed

5. Methods used to determine if a particular

variance should be investigated 1 2 3 4 5

a. No formal method used (decisions based on managerial judgement) X

b. Where the variance exceeds a specific monetary amount X

c. Where the variance exceeds a given percentage of standard X

d. Statistical basis using control charts or other statistical models X

6. Please indicate how important each cost variance is as an aid to

control in your organization 1 2 3 4 5

a. Material price X

b. Material usage X

c. Material mix X

d. Material yield X

e. Wage rate X

f. Labor efficiency X

g. Variable overhead efficiency X

h. Overhead expenditure X

i. Fixed overhead volume X

j. Fixed overhead volume efficiency X

k. Fixed overhead volume capacity X

l. Sales volume X

m. Sales price X

7. Net assets RM (book value) (Choose one answer)

X a. 0-100 million

b. 101-200 million

c. 201-500 million

d. Above 500 million

8. Numbers of employees (Choose one answer)

a. Below 150

X b. 151-500

c. 501-1,000

d. 1001-5,000

e. Above 5,000

Importance (1 - low, 5 - high)

Frequency (1 - never, 5 always)


Importance (1 - low, 5 - high)


is standard costing still relevant? by haris awang

Economy & Finance