This assessment will cover following questions:
- Explain what target costing is and compare and contrast it from standard costing.
- ASL Plc is the largest service suppliers in UK. Evaluate the features of standard costing as a planning and control system.
- Generate the relevance of standard costing as a planning and control system in ASL Plc. Did it satisfy the features discussed?
- Is target costing appropriate in today’s competitive and uncertain business environment? Explain with examples from your target costing article.
Managerial accounting implies to the mechanism and practices for developing records and reports for supporting managing officials in the corporation's decision-making functions. It is a wider filed which also involves techniques and approaches to support managerial and accounting practices (Pettersson and Segerstedt, 2013). This study involves explanation about features of standard costing with regards to planning and controlling system, comparison between target costing and standard costing. It also contains discussion on target costing relevancy in present uncertain and competitive business environment, and recommendation for contemporary organisations to apply for planning objectives in context of ASL Plc.
(1). Features of standard costing as a planning and control system:
Standard cost control (first being a budgetary regulation) is one of the most advanced cost accounting enhancements. traditional costing is a cost management technique. due to the drawbacks of traditional costing, standard costing has been ado0pted in many sectors. Traditional costing, which relates to the costs estimation after it has taken place, reports the evaluation of what has taken place (Hilton and Platt, 2013). Management considers control by means of standards and standard costing as an innovative system, which determines whether or not company's funds are utilized appropriately. During budgetary control cycle the standardized costs are generally calculated because they are effective in planning flexible strategies and assessing performance. This allows us to create competitive prices as well as to define the production costs which must be controlled in relation to standard costs. Various models demonstrate how negative patterns can be reversed correctly evaluated. When the different costs controls are taken very carefully immediately, a good standard costing program enables to manage costs and reduce costs. One objective of the standards is to establish a goal, and this can gain inspiration. An inadequately-implemented standard costing framework could have a humorous impact on individuals. this could be retorted, that norms should enable executives to exercise freedom without apprehension of resentment in order to fulfil their role efficiently. The practical challenge with this approach is to balance the requisite independence of management with poor performance. The principal aim of the standard costing is to remind management about everyday operational control. Predetermined expenditures are normal costs, which provide a foundation for successful cost control. The costs of criteria reflect the criterion for evaluating it. Following is summary of all the discussed key features of Standard Costing relevant for establishing effective planning and control processes, as follows:
- Standard costing is structured to asses’ costs of outputs supported on previous period experiences as well as future trends.
- Cost comparison. In it actual expenses/costs are compared to standard/budgeted costs.
- Control over different-variances: comparing standards and actual expenses to assess and control variances.
Recognise key areas: Variances identified in standard costing help to allocate key areas which are threat in planning and managerial controlling (Maher, Stickney and Weil, 2012).
(2.) Standard costing as a planning and control system in your real-life case company:
Here in study real life company named Beximco Pharmaceuticals Ltd which is pharmaceutical company working in Bangladesh. Beximco Pharma is a rapidly growing generic player of drugs undertaken to offering access to inexpensive drugs. The state-of-the-art production services of company have been licensed by regulatory bodies in USA, Australia, European Union and Brazil, and this is currently focusing on establishing presence in several developing and established markets all over the globe. manufacturing operations of Beximco Pharma are situated over around 20 acre (81,000 m2) area in Dhaka,Bangladesh. The projects are comprised of a variety of intent-built plants such as a new plant for Oral Solid Dosage (OSD). The plant contains fabrication facilities, research labs as well as no. of factories. The plants and equipment were built, assembled and assembled, amongst others, by collaborators from Italy, Germany, Sweden, Switzerland and UK. One of key industries of Bangladesh's national economy field is pharmaceuticals and chemicals companies. The pharmaceutical sector achieves around 97 per cent of regional market's total drug requirements. It hires around 115,000 workers, market size is around BDT 117 billion. According to figures from Bangladesh's Manager-General of Drug Affairs, the overall number of companies manufacturing medication is: allopathic around 258, unani around 268, homeopathic around 79, ayurvedic around 201, and Herbal around 17. There are over 100 corporations in Bangladesh which manufacture different chemicals. Standard costing is best suited for activities involving a variety of unusual or repeated operations. Procedures are often repeated in organizations and thus standard costing of such organizations is important. For non-producing industries where the processes are routine, standard costing methods can be implemented. Furthermore, non-repetitive practices can not readily be carried out, because there is no foundation for repetitive procedures to be observed, and standards could therefore not have been established. The research showed that around 75 percent (21 out of 28) of the organizations still employ standard costing with various objectives in their businesses. It shows that despite the emergence of new modern managerial accounting techniques such as ABC, Lean manufacturing, six sigma etc., traditional costs in Bangladesh didn't lose their attraction to this field. The explanation for respondent's selection of this form is simplicity. A standard costing mechanism can be applied in organizations which manufacture a large number of distinct products and generate several common activities. Standard costs for actual output for just a specific duration in this costing system may attributed to the executives of management centres who are really in charge of different activities. For actual costs for that same duration, the accountability centres are often paid. Both cost rates are then measured, the normal and the real, and the difference between two becomes reported.
Managers need guidance to examine where the discrepancies have emerged. Accountants can support management in this process, but in practice to carry out an effective audit, it is crucial that they do so with the accountable management. The explanation for the variation is readily identified through doing that together. There are many benefits in terms of requirements, such as simpler measurements, efficient liability as well as performance controls efficiency. Since after the industrial revolutions, standard costs have become an important factor in the world of management materials. They have been evolved and been using when production circumstances were stable for organisations, huge series of standardized goods were manufactured as well as the costs associated with job and materials were the main costs, i.e. a fundamentally different working environment (Matherly and Burney, 2013). Standards may be seen as a guideline to be followed and/or preserved and thus do not comply with constantly improving efforts. There's no impetus for any further progress when the targets are met. it is quite critical to track and control real actions over time while looking for continual improvement. Price levels can also compete directly against improved quality efforts. It is logical for an individual to try to identify the best prices when making purchases. In order to accomplish positive variations, it could be straightforward to comply with the rules on standard quality, but poor quality in material bought may result, for instance, in increased costs due to various increased distraction and cassation. Reliability-in-quality and performance must always be the focal point. Standard costs improve the cost accounting process for valuing inventories. Where standard costing framework is not being applied, the true costs within each particular material object in inventory must be kept recorded Real costs shall also be retained to assess the cost including inventory of manufactured goods. A company does not need to hold store reports and products cost at their real cost into well-working standard costing framework. There are three major factors in standard costing which affects decisions of managers, first one is size of variances, controllability of variances and cost of examining variances. Alternatively, records are kept at standard costs, transformation to true cost happens by marking off all differences as the cost of any duration (Lohr, 2012). There are still a range of deficiencies in standard costing which pose the issue of its sustained use in contemporary production environments. As per journal's study, almost all respondent companies (52.38 percent) claim that standards established by the organisations are increasingly becoming obsolete as internal operating circumstances and external context also shift. Industries are also recording high automation of processes, bypassing quality progress and shortage of detailed information (14.29 percent each) as shortcomings of standard costing method.
The persistence of standard costing confirms its effectiveness and dominance in today manufacturing world. Through the usage of McDonaldization as well as diligent and practical standard setting procedure, the deficiencies identified by the study may be minimized or removed. Because of socio-economic facilities and scarcity of qualified technicians in such regard, use of ABC, lean manufacturing, six sigma etc, is still not common amongst local companies.
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(3.) Discussion on target costing and comparison and contrast it from standard costing.
The target-costing is not only a costing tool, but a planning strategy, whereby costs depend on market situation and take into consideration a variety of variables, including homogeneous goods, competition rates, no / lower cost adjustments for the end user and so on. If these considerations are raised, management needs to regulate the prices, since they have limited or no influence over the sales price. Target costing is a mechanism whereby a corporation plans its price levels, products cost, and profitability it hopes to accomplish for a fresh product in advance Unless a product can be developed at these anticipated levels the development process will be discontinued absolutely. A management department has a valuable mechanism of target costing to constantly track items from the point they reach the development phase and further across its product life processes. This is seen as one of the first and most essential tools throughout the production environment for sustained productivity (Demski, 2013).
In this method, any costs of the item or procedure are designed and controlled earlier in the implementation period, such as production or layout, rather than in the later stage of design and marketing. Target Costing relates to current and successive product cycles. This starts with a detailed understanding of business and a desire to meet consumer expectations regarding the standard of product, functionality, promptness and value.
Target Costing Process:
- Ascertain the sales value for new product-item then forecast the industry evaluation performance as well as the targeted profits.
- Finding the targeted cost by subtracting the profits from value of a product-item.
- For particular elements and procedures, functional cost benefit analysis.
- Determine the predicted cost of the product-item.
- Comparing the projected cost to the targeted cost.
- When the predicted cost exceeds the intended targeted cost, perform the cost benefit analysis to minimize the predicted costs.
- Cost management during manufacturing.
- The ultimate decision on launch of product-item should be made once the projected costs are on track (Warren, Moffitt and Byrnes, 2015).
The costs specifically affected by it is prioritised throughout the target costing mechanism, that involves material including purchase components, tooling costs, production costs, expenditures for growth and depreciation. It is, however, a systematic cost control strategy, so it takes into consideration all of those expenses and assets that are affected by the original determinations on product's planning.
Analysis of core differences among target costing and standard costing:
Product costing concept
The theory of product design comprises initially setting the targeted sales price and then checking that perhaps the targeted cost meets the targeted profit margin.
Historical data is initially used to specify a fixed rate, and then the sale price is fixed.
Helps to pretty much ensures that expenses are managed to keep as low as possible.
Helps to ensure that expenses are contained within the regular costs set. Through measuring variations, controls are established (Park and Jang, 2014).
Continuous elimination of costs.
Every year, standards are revamped.
Target costing relies on a much more conservative approach to pricing relative to conventional standard methods, in which inventory forecasts, general operating, production and delivery expenses are kept in mind. Standard costing decides, adds a labelling and defines a quality, depending on the configuration of products. The market in contrast instructs target costs first by putting a sales price, then deducting target sales and afterwards eventually achieving cost. In organization like appear to discover this delicate balance almost unfeasible, which, combined with the strain to efficiently utilize frightening financial means, will lead to a "stringent" strategy to control. The cost reduction throughout the planning as well as controlling stage of product life-cycle is particularly stressed by target costing as most of product costs are ascertained at this phase. Absolutely "Target costs assign more overall costs to such a development phase, incremental decreases in cost throughout production, relative to standard product cost approaches. A variety of cost management techniques are being used in cost control. Just-in-time, full performance control inventory specifications and quality management are among the strategies advocated by target costing (Nitzl and Chin, 2017).
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(4.) Target costing’s relevancy in today’s competitive and in uncertain business environment:
Target costing is widely advantageous as competition increased intensely and profits were reduced, as rates were dictated progressively by market pressures instead of simply settling costs with adequate benefit. Participants of value chain, like manufacturers and suppliers, can often be helpful. To attempt to foster their innovation and cost management, demands from the industry can be carried on to expanded firms. Target costing is part of a process of product development. It begins by comprehending the needs, requirements, and rates for product and the combination of product, of the user sections in directed competitive markets. The client will show the profit to be paid for the commodity and its versions. the highest sustainable cost. Margin must be sustainable throughout the entire life cycle of the company (Bargate, 2012).
ASL is driven to utilize target costing by several considerations. Firstly, it can help business to define manufacturing costs, which are calculated throughout the design phase in order to optimize the opportunity for reducing costs by utilizing target costing. In addition, the cost goal often includes evaluating other issues that may contribute to even more general management problems. The pace of the competitiveness has become one of the variables which directly affect industry-driven costs. The magnitude of a company's goal cost increases with the strength of competition. ASL has continued to distinguish the products from its rivals cantered on its outstanding functionality. As a result of the decreased competitive pressure, ASL has a somewhat complex costing mechanism than other businesses. Moreover, when targeted costing are applied to ASL Company, they are less advantageous than other companies since each newer generation of ASL products has a greater level of growth. Still, with up-front investment items, ASL does not need a life-cycle analytical method. If expenditures at the start are high, the advantages of cost target are smaller. In addition, many factors affecting target costing processes are detrimental to ASL. Because of its advanced manufacturing, the business has also built a competitive edge, which allows it to design products which are practically up to date. Instead of being a market boss, the organization is labelled engineering leader. In fact, target costing is also an aspect in which market research and costing intersect. Branding and marketing roles use the cost goal to define the characteristics and sales price of a product. ASL can regulate all operations with the target costs under this framework. All managers of the company participate in the designing and production of the item at target cost (Ibarrondo-Dávila, López-Alonso and Rubio-Gámez, 2015).
(5.) Systems for contemporary organisations to use for planning purpose:
There are different systems in managerial accounting field and each system has its own significance and limitations. But based on above discussion and ASL case study, following are some key systems relevant for planning as well as control, as follows:
Cost Accounting System: It provides a systemic set of standards in which costs of manufacturing products are tracked and disclosed in depth information in the totality. They include ways in which such costs are acknowledged, classed, assigned, collated and disclosed and contrasted to standard costs. The ultimate aim is to inform managers about how to improve business methods and procedures centred on cost effectiveness and strength. Cost accounting gives details on the costs of the processes and the long term planning controls for managing. It helps in developing a framework for effective planning and controls (Halbouni and Hassan, 2012).
Budgeting System: This can function in a number of ways and therefore many methods can be applied. Budgets may be employed as a predictive and strategic planning tool. This system's implementation could also be utilized for a motivational mechanism. The system can be applied as an analysis and monitoring performance and as a data for decision-making tool. In conjunction to planning or reviewing financial reports and comparing them to actual fiscal reports, several different methods to budgeting process can also be used according to the intended purpose of the Organization. For illustration, Breakeven review measures the sales volume necessary to cover costs for a fresh product.
Control is indeed a key managerial feature. The significance is evident when company understand that it is important for all management tasks. Command monitors failures and advises how to handle or face significant obstacles. The organization's success therefore depends on efficient management. For planning purpose both systems would be efficient for respective company. While budgeting system is more focused on establishing control over all the operational activities. Here it has been recommended to ASL that company should adopt these above discussed systems with aims to establishing efficient proper planning processes and developing controlling effective framework (Braun, 2013). Adoption of such system will lead to boost in overall performance of corporation.
From above study it has been evaluated that standard costing is still in current environment is useful however its relevance has been decreased due to target costing. But presently companies are applying both methods simultaneously to boost their performance by establishing effective controlling and planning. Moreover, there are several other methods which contributes in organisational planning and managerial controlling task. One or more systems can be simultaneously used in a business organisation according to their managerial structure and issues facing in current market environment.
- Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
- Pettersson, A.I. and Segerstedt, A., 2013. Measuring supply chain cost. International Journal of Production Economics. 143(2). pp. 357-363.
- Maher, M.W., Stickney, C.P. and Weil, R.L., 2012. Managerial accounting: An introduction to concepts, methods and uses. Cengage Learning.
- Matherly, M. and Burney, L.L., 2013. Active learning activities to revitalize managerial accounting principles. Issues in Accounting Education, 28(3). pp. 653-680.
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