The Relevance of Standard Costing in Modern Business Environment (Essay Sample)
Standard costing involves determining the expected value by substituting the expected cost from the actual price in the accounting records. On record, variances are established to differentiate the expected cost from the exact cost. Standard costing is more convenient are simplified as compared to other layering cost systems such as FIFO and LIFO approaches. Standard costing accounts for large amounts of historical cost information where there is a need to contain the inventory items. However, it creates estimated costs either for all or some activities of the organization. Standard price is essential in evaluating the actual cost compared to other time-consuming approaches when calculating the exact cost.source..
Standard costing involves determining the expected value by substituting the expected cost from the actual price in the accounting records. On record, variances are established to differentiate the expected cost from the exact cost. Standard costing is more convenient are simplified as compared to other layering cost systems such as FIFO and LIFO approaches. Standard costing accounts for large amounts of historical cost information where there is a need to contain the inventory items. However, it creates estimated costs either for all or some activities of the organization. Standard price is essential in evaluating the actual cost compared to other time-consuming approaches when calculating the exact cost. Despite standard cost being unique and different from the actual cost, cost accountants periodically employ calculations that distinguish factors of labor and cost of materials. Also, accountants can manage standard charges to set a closer alignment to the actual price. Standard costing was first introduced in 1920 to replace the traditional cost accounting method based on historical costs.
Ratios and efficiencies were the most vital variables in computing the standard cost based on labor and material cost. , the actual cost should differ from the expected cost to avoid problems used to ascertain the standard cost. The standard cost was introduced like a century ago when labor cost was an essential tool in Manufacturing. Most of the standard methods emphasized labor efficiency. George emerged as the first person to implement the standard cost approach when labor was the most significant fraction of production during this era, regarded as the variable cost. During the 19th century, workers did not evaluate the actual time required to work, like how many hours. Later on, cost accountants focused on how managers efficiently used labor because it was a vital variable resource. Many workers worked almost forty hours, and their cost remained fixed, which raised concern for accountants and the labor task team. Today's central approach in management accounting is a typical example of the traditional standard costing established in early 1920. Standard costing is applicable in recording the financial statement reporting valuation of the income statement like goods sold and inventory valuation. Drawing illustrations from our question, we shall categorize our discussion into two parts. To analyze the above discussion, we shall look at both the advantage and disadvantages of standard costing to conclude. Business involves all potential economic activities conducted by humans that include production or exchange.
We can trace business history in three-phase the pre-industrialization era, industrialization, and business in the networked era. The industry, like human history, civilization has influenced human life from the middle age era to the modern era, the same case to the evolution of business. The pre-industrialization period was influenced by agriculture as the primary source of income across the globe. Trade emerged as a barter among individuals that later become stable and diverse across continents. During this era, trading commodities, people used jewels, art pieces, dry fruits, and metal. Industries contained Manufacturing in different levels such as weaving, metal crafts, and wood manufacturing. Trading dominated in areas that were more urbanized centers that spread across Asia and Europe. Empires that organized trading points and exchanging terms. The second phase of business evolution was during industrialization. When the world became more civilized in the 19th century, the business gained popularity and enhancement due to advanced machines, but land and labor remained the main factors of production. Technology initiated multiple efficiencies of work, enhancing production beyond the consumption capacity. Surplus production facilitated trade that resulted in the creation of modern markets marked as the industrial age. The scientific revolution was the starting point of adverse business where machines began to replace human labor, increasing production.
The increased production lead to the introduction of new trading routes and markets. In the 19th century, business and trade shot up to different levels taking center stage of human social existence. Money emerged, declining gold and silver leading to the introduction of artificial business in America. Business is a vital tool in the economy, countries, companies, and people as well. Taxes imposed on business sustain the countries economy in various prospects. Advanced technology has enhanced business and trading activities across the globe. People can conduct the transaction online regardless of the location. Today people rely on technology to advertise and improve their market increasing revenue by generating more income. The advanced technology resulted in automation, a process whereby human labor is replaced by machines producing goods automatically. Automation emerged as a result of modern technology, causing a disagreement of the future net of employees. The interaction between automation and labor institutions entails vital policies that shape the operation of the labor market. The ideology of automation has a significant impact on individual workers such that it portends mass unemployment. However, the most crucial effect is experienced in the manufacturing sector, where employment suffers compared to the service-related industry that opts to improve. Several questions came up based on automation's social and economic impact on labor costs, creating job displacement among people.
Automation has displaced several workers causing an employment crisis and enhancing monopoly power. It has contributed to a loss of human interaction leading to lower quality of life. Standard costing has both pros and cons to human life and the economy at large. People live under a specific environment dwelling on the principle that "time is money" information essential in decision-making. Standard costing is vital accounting information whose outcome is accurate and instance historically. Some forsake it as a complex phenomenon, but it is an essential tool in decision-making strategy in accounting. Understanding this information better, we need to address the principle of standard costing but first, let's know the difference between standard and budget. Budget is an overall concept or total while standard resembles the same information but on the principle of unit basis. If not carefully examined, the two are interrelated, and people might conclude they are the same. The predetermined cost is allocated to a single unit but can be broken into further expenditure or volume parts referred to as standard.
Effective management performance should consider standard cost as a stepping stone or starting point in management. Standards can outline the real expected value regardless if it is about usage or costs, or both. The setup of standard costs can significantly influence the relevance and usefulness of an organization. The ultimate goal of standard costing is to avoid inefficiency or irrelevant impact on morale. The significance of standard costing is to reflect the established target undercurrent, regular, and operating situations making it robust effective management and cost monitoring in organizations. The calculated standard cost enables managers to implement a detailed variance analysis to distinguish the expected cost from the actual cost. With reasonable standard cost, management quickly identifies any inefficiency or risk-related issues, and a proper remedy can be instituted to avoid any insignificance of the organizational performance. The satisfied standard cost reflects the current conditions to the extent that a precise degree of reliance is achieved when making internal decisions. Keeping in mind that standard costing does not favor all industries but suitable for organizations with a series of shared activities essential in determining the value of input per unit. Therefore, companies lacking repeated actions cannot apply the standard cost principle since it is impossible to set standards.
Standard cost is more applicable in the manufacturing industry despite its use not limited to manufacturing industries. In the field of management, the standard price is vital in attaining the companies goals and objectives. Management implements the organization's objectives and uses standard costs to analyze the possible problems by comparing them with the actual price. To ascertain whether the standard cost is relevant to organizations, we shall discuss the nature of standard price and other applications of standard costing. The cost is not only estimated but also the main goal to be attained in the result. If accountants utilize ethical principles of the standard price, their development presents a good performance in the organization. Most organizations use economic models to determine the companies' performance at the managerial and financial levels and manufacturing sectors. To determine the standard cost, manufacturing companies calculate the cost of each production using direct labor, materials, and manufacturing overheads essential in production. Sometimes it is much easier to calculate the standard cost using manufacturing overheads than natural material and labor. The principle behind this theory goes by the formulae; standard direct material cost per unit is equivalent to the standard amount of material produced multiplied by the standard price of the material. Also, it is essential to understand the difference between the terms; Standard price is the price per unit of inputs in the production process, as the price per dollar of raw material. On the other hand, the standard cost ...
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