• Internal Code :
  • Subject Code : HI5017
  • University : Holmes Institute
  • Subject Name : Managerial Accounting

Managerial Accounting

Abstract

The paper would be critiquing over the stated journal and would be introducing various ideas related to the aspect of financing and accounting. In the discussion features regarding standard costing as controlling and planning system will be evaluated.  Furthermore, the concept related to of target costing and standard costing would be discussed in brief. Thus, allowing the reader to understand every possible dimension to the work with acute details. Thereby the concept of these two tools even is being clarified by the paper.

Keywords: Finance, Standard Cost, Target Cost, Effective cost, Target market, Direct costing, Material costing, Estimation

Table of Contents

 

Introduction 

Background 

Journal Article Critique 

Standard Costing 

Relevance of standard costing as planning and control 

Discuss what target costing is and compare and contrast it from standard costing. 

Relevance of Target Costing In Current Market 

Effectiveness of the tools 

Conclusion 

List of References 

Introduction

The paper will discuss the management accounting system which is the most effective system for an organization as it deals with the most important organizational aspects where it monitors the process of the organization entirely. In a better verse, it can be said that internal accounting mainly stated as managerial accounting through which an organization can evaluate and measure the development of the process. Information is being provided through the financial accounting where the information is offered to the outside of the organization where creditors and stakeholder can be mentioned. The paper will discuss all the details regarding the aspect where certain points will be evaluated thoroughly. In the discussion features regarding standard costing as controlling and planning system will be evaluated. The evaluation will be done as per the finding from the scholarly articles. The relevance of standard costing even will be incorporated into the paper. Further, the concept of target costing will be discussed in its brief followed by the relevance of it. At last, the paper will offer the argumentative discussion regarding the effectiveness of the referred aspects in the concern. 

Background

The paper is dealing with management accounting system where two basic concepts need to be clarified – target costing, standard costing. Target costing is all about an approach where the cost for the life-cycle of a product can be determined. The determination would be sufficient enough to enhance quality and certain functionality of the product receiving better profit in its concern. A target cost is being set through the subtraction of wished profit margin by a competitive price of the market. The maximum amount regarding the cost is target cost which can be incurred on the product. However, the profit margin can be achieved through the selling price. The advantage of the tool is to analyse the products to obtain the lowest cost. Thereby minimizing cost is the most important purpose of the tool. 

Standard costing system can be referred to as a tool in the genre of accounting where the evaluation of cost management performances, controlling, managing and planning a budget can be done by the tool. Estimation regarding required cost for the production process can be explored through the standard costing system. The standard costing system helps in product costing which satisfies the purpose of the decision-making process. Though the process is time-consuming, however, effectiveness for controlling the cost serves the purpose of the tool.  

Journal Article Critique

Standard Costing

It is important to note that the standard accounting system is specifically an instrument for planning and control system. This effectively lets the usage or the control over costs and evaluation of specific performances of cost management processes. The method of a standard costing often revolves around the estimation of the required costs for the commencement of the production aspect of the stated process. However, prior to the start of the accounting process or the related period, determination of the standards and sets are essential factors to abide by. Apart from the mentioned the related aspects of direct costs related to the labour involved for the production process to the direct materials cost required to initiate the entire business development is an essential part at establishing the entire process. Therefore, it can be stated that the mentioned would essentially serve as the standards to the entire plan and the production as well as the proposed operation process (Van Baalet al., 2018).

It is worth mentioning the aspect that during the accounting, the actual or the real figures are used for retrieving the generalized direct material costing. Therefore, further the direct amount as retrieved is utilized and pay standard rated for the labour involved for the entire business process is understood. The same is therefore compared and contrasted with the previously set standards for better understanding to the entire thus letting a greater degree of understanding to the variance among the retrieved standards. This would eventually allow the planning and the control management to improve the entire cost control as related to the establishment and effectively set the standards. The section of the document allows a better understanding with the help of featuring the fundamental understanding and the advantages and disadvantages related to the same. It is understandable that such a process would feature both aspects of advantages as well as disadvantages. However, the entire business industry and the current practices would allow the usage of the specified practice with a higher degree than the other alternatives (Lenk et al., 2017). The aspect of standard costing would be directly related to the gravity related to the standardization, planning and controlling the cost; thus, allowing a better aspect of decision making in the business process. 

There are several benefits of Standard costing system. For these benefits, standard costing system is preferable in a huge industry which deals with complex financial scenarios and structure. Some of the most common benefits of standard costing system are as below:

  1. This system provides a developed cost control to a business system. This can be used to make the cost control of a company better. 

  2. Standard costing system has many detailed information in a structured format. There are several details about every single costing units and variables. This is beneficial for the management of a company as the decision making get easier by this. 

  3. This system of costing offers a better inventory measurement for the business. This further helps the outcome and efficiency of the entire business process. 

  4. Their needs a certain amount of cost in keeping the records. In case of standard costing system, this cost became reduced. 

  5. Production costs of the entire system gets lowered by this system also. 

Though there are these aforementioned benefits of using standard costing system, it is not appropriate in all businesses as there are some limitations also.  Low morale of some employees takes places in some cases. Also there are some complexities with the variances used in this system.

Relevance of standard costing as planning and control

According to Goncalves et al., (2018) as the standard costing system is well approved throughout the world, the standard costing system has a great relevance in the normal life as the standard costing in the article reveals that the costing helps in the better estimation of the required resources. It helps to set a target. The portion indicating the target cost construction indicates that it becomes easier to manage cost structure of the organization. in the real life company, the standard costing gives a direction to the planning and control of the cost. It proved to be powerful strategic management tool that helps to plan profit quite extensively. In the real life company, the standard costing system such as Target Costing proves effective in managing the company. it is a well approved tool in managing, planning, budgeting and controlling and evaluating the cost management performance.

The standard costing system in the real life company efficiently estimates the needed cost of process of production. The standard cost in the real company helps to estimate the required cost of production and its associated process. it also estimates the labor and material cost of production. It also estimates the budget for the production process. when the accounting period comes to an end, the use of costs of direct material dm actual amounts are calculated. The previously set standard is judged as per the standard an actual cost of production including the labor cost. It gives the managers an opportunity to manage to improve and control the cost efficiently and effectively.

The real life company is well benefitted with the standard costing system. It proves very effective in decision making as the cost of product and product is well estimated with it, but sometimes, the use of the system is found to be expensive, time consuming and labor extensive. It needs to be changed if the production system requires a change. As most of the companies have employed the similar techniques of costing, the standard costing has become a means of all accounting solution for a sufficiently long time.

The article description well approves the fact that it helps the companies to keep the relation with other companies or terminate the contract with the company. Many companies have rejected taking part in the accounting due to stagnation. There are many real life companies which has rejected the standard costing as the part of their accounting system and went to follow the Activity based Accounting system to satisfy the requirement of modern time as it is fast and consumes less time in comparison to the standard costing system. Despite the recent setback of the standard costing system, the real life more than 75% companies in America have employed the standard costing system. In other countries like UK, Sweden and Ireland, the real life companies have kept it as the main stream accounting system which is widely approved and will be regarded as one of the best budgeting system worldwide. The system is still employed by a large number of international companies.  

Discuss what target costing is and compare and contrast it from standard costing

A standard cost can be predetermined as the budget per unit cost regarding the service or product under such working specified conditions. Such types of conditions or circumstances are generally current with the actual working condition because of the standard which will able to reflect what actually needed to be achieved under such type of conditions related to existing working cultures. However, on the other hand, the target cost is considered as the major desired cost. Such type of cost cannot be achieved under such current working conditions; however, it will require necessary changes in the different production methods. Especially the calculation of the standard cost is concentrated inwardly and never considered upon the profit level or price level. The target costing or desired costing generally starts with such external selling prices regarding the services or products and then the different works, which are backwards to the calculated target cost by the profit level, which required in such a deducting nature. Moreover, usually, the Standard costs are being calculated for the existed services or products. On the other hand, the target cost can be calculated for the planned products like such type of products, which are in a designed phase. After much discussion, it can mean that the process of design can be changed as well to help in achieving the desired target cost (Nishimura, 2019).

However, compared to the traditional way of standard costing which generally approaches in such a way where the marketing of the general administrative and distribution cost can be taken into consideration for estimating the very or exact price of the product or service. In the time of targeting, the cost, which takes on an excessive proactive approach in the field of pricing, the price of the service or product can be estimated in the initial stage and then the process of manufacturing cost will be measured and considered later. Generally, the traditional method of costing can determine the cost-based design related to the service or product which can able to add markup and then it establishes the price. However, the target which is in comparison related to target the costing, which will set the proper selling price at the initial stage and then it will subtract the targeted income. At last, it can reach an efficient final cost which will be able to determine the exact design of the product or service (Armitage, Webb and Glynn, 2016).

Moreover, the product or service related to different costing methods and the estimated cost can be more incurred in the time of the stage of development. Simultaneously, by reducing the costs in the period of the production stage, in comparison regarding the target costing can be emphasized towards the reduction regarding the cost during the design stage and planning stages of the entire life cycle of the services or products (Wouters et al., 2016). Since, there is a majority raised in the product or service cost, which can be determined as such stages. As for the numbers related to different techniques of cost, engineering can use in the process of cost reduction.

Relevance of Target Costing In Current Market

For determining the validity or relevance of target costing in today's competition it is important to recognize the meaning of the same. Target costing is an approach for determining the life-cycle cost of a particular product based on the sufficiency of the same for developing the quality and functionality of the product with regard to its expected profit. It primarily involves setting a target for the appropriation of cost for a particular product. This process with taking into consideration the subtracting method of an expected profit margin from a market price (Gonçalves, Gaioand Silva, 2018). It is further to be demonstrated that a general product cost estimate is derived after subtracting an expected profit margin. Competitiveness of the market might affect the cost in this process.

There are a number of advantages in target costing. The process of target costing shows the commitment of management for processing the improvement and innovation of the product. With the implementation of this process, one can make sure about the quality of the product being introduced in the market. Therefore, it will eventually benefit the financial outcome and business growth. With regard to the competitiveness of the current market, interrelation of the same with target costing is to be determined. It is initially discussed that there are several benefits of target costing including enhancement of target base and improvement of product quality (Navissiand Sridharan, 2016). In the case of a business, the ultimate intention is to enhance the growth and meet with a better financial outcome. It is hard to fulfil this requirement following the competitiveness and uncertainty of the market. The market is subjected to continuous change. For keeping up with the changes in the market the business organizations need to make their strategies efficient and effective. Target costing with the advantages it possesses can help the organizations in overcoming the existing issues in the market. The organizations further can lead to achieving growth in their business and financial outcome. Therefore it can be said that the relevance of target costing in the competitive market of today as well as the uncertain business movement, can be proved to be beneficiary to some extent.

As demonstrated by Daria Zimina, Glenn Ballard & Christine Pasquire (2012), in their article on target costing and value design, the outcome of that costing is an effective technique of management. This particular technique has been used in case of manufacturing for decades in order to achieve the predictability of cost during the time of product development. On the other hand, the authors have further analysed the benefits of target value design. Interrelation and effectiveness of these two techniques have been taken into conversion by the authors. The result of the research done on twelve construction projects in the United States has helped this project in case of developing the expected outcome and testify the validity of the same. This particular paper further examined the validity of the terms and implementation of the same over the existing market. As a concluding factor, positive outcomes of the study were found in favour of the matters in issue. 

Effectiveness of the tools

Target costing can be better among the two referred tools for the planning purpose as it exercises the homogenous set of tool for cost planning and cost management. The tool helps to plan the different steps through which the cost can be reduced or minimized. The minimization takes place in the organization as an analysis for the cost of each phase is done through the referred tool. Further, it even helps in the manufacturing process and improving the technologies which are the outcome of the better panning. Target costing follows certain steps to be facilitated where the customer needs identification is done which is the process of planning as identifying customer requirement is an important fact for the organization to become successful and planning needs to be done in this regard. Further, the tool helps to obtain better planning for deciding the selling price which needs to be aligned with the needs or requirements of the market. Target cost further can be identified by the target costing system which confirms the effectiveness of the planning process. The toll even considers the identification for efficient suppliers to fix the manufacturing process. Finally, the tool proves itself as an effective planning tool by comparing certain sample products by aligning with the targets and objectifies the initiation for the production for launching the product. 

Standard costing is the better objectification for controlling tool. The production process can be estimated through standard costing. Further the controlling can even be obtained through the tool by comparing standard cost with the actual cost to judge the variances. Further, it helps the managers in improving cost control, followed by operational efficiency and cost management. Thereby it can be understood that it is a tool for assisting the managers in different aspects. It is a known factor that managers are appointed with the responsibility of checking or controlling the entire process. The tool thereby is considered as the perfect tool for assisting all the managers to check the operational efficiency and management. The referring is evident enough to confirm the fact that the tool is for controlling the entire process. The tool even helps in establishing budgets where controlling is a must. Further, the tool helps in measuring, motivating, and controlling the costs in the work culture. The control for cost reduction can even be addressed with the tool. The entire procedure is even simplified by the tool which proves its controlling power for the organization. 

Conclusion

The paper offers a descriptive analysis of the management accounting system where target costing and standard costing plays the most important role. Thereby the concept of these two tools even is being clarified by the paper. It is the discussion it covers certain valuable aspects regarding the management accounting system where features for standard costing as the part of control and planning system is depicted. Further, the discussion from the scholarly articles throws light on the factor of the relevance of standard costing in the context of the organization. The evaluation of its effectiveness is depicted in the paper. Further, the features of target costing with its relevance are discussed.

List of References

Armitage, H.M., Webb, A. and Glynn, J., 2016. The use of management accounting techniques by small and medium‐sized enterprises: a field study of Canadian and Australian practice. Accounting Perspectives, 15(1), pp.31-69.

Daria Zimina, Glenn Ballard & Christine Pasquire 2012: Target value design: using collaboration and a lean approach to reduce construction cost, Construction Management and Economics, 30:5, 383-398

Gonçalves, T., Gaio, C. and Silva, M., 2018. Target costing and innovation-exploratory configurations: A comparison of fsQCA, multivariate regression, and variable cluster analysis. Journal of Business Research, 89, pp.378-384.

Lenk, S., Rybski, D., Heidrich, O., Dawson, R.J. and Kropp, J.P., 2017. Costs of sea dikes–regressions and uncertainty estimates. Natural Hazards and Earth System Sciences, 17(5), pp.765-779.

Navissi, F. and Sridharan, V.G., 2016. Determinants of target costing adoption: a research note. Journal of Management Accounting Research, 29(1), pp.67-77.

Nishimura, A., 2019. Transforming Cost Design into Environmentally Conscious Cost Design in Japan: Likelihood and Problems for Further Development. In Management, Uncertainty, and Accounting (pp. 153-183). Palgrave Macmillan, Singapore.

Van Baal, P., Morton, A. and Severens, J.L., 2018. Health care input constraints and cost effectiveness analysis decision rules. Social Science & Medicine, 200, pp.59-64.

Wouters, M., Morales, S., Grollmuss, S. and Scheer, M., 2016. Methods for cost management during product development: a review and comparison of different literatures. In Advances in Management Accounting (pp. 139-274). Emerald Group Publishing Limited.

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