A survey on the Implementation of Standard Costing

In current years, various tools such as activity-based costing, the well-balanced scorecard and target costing have been used in the business enterprise community. However, traditional management accounting systems continue being widely applied. One of these is standard costing, which includes been applied to a wide entry over the last century.

The reason for this newspaper is to look at the widely use of standard costing system. Despite it is less relevant than newer accounting methods, standard costing is far from obsolete. Because of its simplicity, overall flexibility and affordability, standard costing remains a well liked cost accounting method among accounting and funding professionals.


In today's time of rapid technologic change, rough global and local competition, total cost management is central to sustained corporate profitability and competitiveness. The management emphasis today is to minimize cost. The price leadership strategy does not mean compromise on either quality or technology or product differentiation. Low costs are no benefits, if the clients are not happy to buy the product of low cost firm. Cost management has to be driven with customer as the concentrate.

The survival way for any business is how to manage its product/service cost, quality and performance. The customers are continuously demanding high quality and better performance products/services and at the same time, they want the prices to fall season. The shareholders are also challenging a required rate of go back on their investment with the business. Thus, cost has become a residual. The task is being able to make or provide service with the stipulated cost framework. Thus, cost management must be an ongoing ongoing improvement program.

Standard Costing

In modern times, various tools such as activity-based costing, the well balanced scorecard and aim for costing have been found in the business enterprise community (Kaplan & Cooper, 1998; Kaplan & Norton, 1996; Ansari et al. . . 1997). However, traditional management accounting systems continue being broadly applied (Brewer, 2000).

One example of traditional management accounting is standard costing. Criteria can be used with either job order or process charging system to provide important info for managerial planning, controlling, and decision making. Standard charging assists in arranging finances and evaluating managerial performance. The major motive to work with standard costing is basically because it facilitates product costing estimation (Ask & Ax, 1997). Ask and Ax's analysis is recognized by a report conducted by Puxty and Lyall (1989), which reported that 76 percent of the united kingdom commercial and professional companies operate a standard costing system.

Although it is employed widely, people just lately criticize it might not provide the information needed in the current competitive environment. Regardless of the criticism, there are few indications that the use of standard costing will decrease. The review from Ask and AX (1997) revealed that 12. 6 % of the companies investigated stated that they would abandon criteria but on the other hand, 9. 9 % explained that they wish to convert to standard costing system.

The History of Standard Costing

The standard costing system was developed in the first 1900s. Corresponding to Drury (1992), it was the clinical management principles recommended by F. W. Taylor and other engineers. Scientific engineers developed information about expectations to create "the best way" to use labour and materials resources within production. Technicians used the specifications to provide information for planning the movement of work so the throw away of materials and labour was reduced. Interestingly, engineers didn't consider expectations as a tool to control financial costs in those days (Drury, 1992)

The first thoughts of using expectations as an instrument to control costs came from G. Charter Harrison, who designed the first standard charging system. Started in 1911, Harrison performed for the Supervisor Manufacturing Company, Illinois, in USA - creators of work gloves. It had taken him a couple of years before he released the first set of equations for the examination of cost variances (Solomons, 1968)

Harrison was not really the only person on the standard costing landscape. In 1908 and 1909 Harrington Emerson recognized the introduction of an information system specifically aimed towards the accomplishment of efficiency targets. Emerson stated that information about benchmarks allow managers to differentiate variances that are credited to controllable conditions and variances that are triggered by conditions beyond management's control (Solomons, 1968)

Traditionally standard priced at systems are being used in order to aid the making industry. Today standard costing is widely used by all types of industries.

The Purpose of A Standard Costing System:

The reason for cost and management accounting is to provide financial information to managers to help them to plan activities, control the actions and see the financial implications of any decisions they make take (Hussey & Hussey, 1998). Standard costing systems provide cost data that can be used for most different purposes.

Ask and AX (1997) have recognized several fields of application when it comes to a typical costing system. Their survey has the following reasons/purposes why an organization may use a standard costing system:

Product Costing 82. 4%

Inventory Valuation 64. 8%

Variance Evaluation 56. 0%

Budgeting 45. 1%

Transfer Prices 31. 9%

Drury (1996) provides wider view of the purposes. He says that the key purpose a typical costing system can be used are:

To assist in setting up budges and evaluating managerial performance.

To become a device by stressing those activities which do not match to plan and therefore alert decision-makers to the people situations that lots of be uncontrollable and in need of remedial action.

To give a forecast of future costs you can use for decision making purposes.

To simplify the duty of tracing costs to products for inventory analysis purposes.

To give a challenging concentrate on with individuals are motivated to accomplish.

There are numerous advantages with criteria. Calculations are easier made and an effective performance controls are enabled, which provide possibility to savings.

Critique Against Standard Costing Systems

Standard costs are major elements within the management accounting area. They were used when organizations' conditions were stable, standardized products were produced and labour and materials costs were the major costs components. But today's business environment differs.

The complications in the making process are increased when products are many and product series are short. (Ask & Ax, 1997) When problems increase, they have more complicated interpreting of variances. Moreover, it could be difficult to tie up the variances to the particular persons or this areas.

Also, when the production conditions become more complex, the amount of fixed costs boosts. Therefore, fewer opportunities will effect the full total costs for a while. Professionals have less interesting to control by using traditional thinking how costs are inspired by volume.

As shown above, standards may be difficult to set in today's energetic conditions. A typical costing system may be expensive to maintain and the additional record-keeping may become a burden to managers and they lose self-confidence in the system. (Hussey & Hussey, 1997)

Richard Fleischman and Thomas Tyson claimed that standard costing cannot provide adequate assistance in the regions of development strategy and operational management. (Fleischman and Tyson, 1998) Don Hansen and Maryanne Mowen express standard costing system as potentially "dysfunctional". (Hansen and Mowen, 2002) These criticisms have added to the dismissal of standard costing, especially for large companies which have more superior method such as Activity Structured Costing (ABC) and focus on costing. Mike Lucas even questioned that whether it's still befitting school accounting programs to instruct this issue. (Lucas, 1997)

Global Acceptance of Standard Costing

While academics pointing out the weaknesses of standard costing, people detected that accounting tool continues to be widely used across the world. Studies proved that in developed countries the standard costing using rate is really as high as 73% in the U. K. and 86% in Japan. (Garg, Ghosh, Hudick and Nowacki, 2003)

More specifically76% of 303 accountants in the U. K. and 73% of 85 money and accounting specialists in New Zealand use standard costing. (Guilding, Lamminmaki and Drury, 1998) The authors also found that accountants looked at modern costing and development management tools as having no impact on how widely standard costing and variance examination are used. A study by Maliah Sulaiman, Nik Nazli and Norhayati Mohd Alwi of companies doing business in Malaysia found similar wide-spread dissemination and persistence of standard costing: 70% of 66 local businesses and 76% of 21 Japanese are using standard costing.

These studies reveal that standard costing will not overemphasize cost control; however, it is linked to quality management. Furthermore, the Lucas and Sulaiman studies show that companies use historical performance rather than predetermined engineering criteria on genuine costs. Rather than using newer and costlier systems, companies chose to reconfigure existing system with more precise plans, implying that firms have adapted standard costing to their specific needs and have not deserted it.

Swiss Chalet Standard Costs System:

System Description

In order to demonstrate that standard costing is definately not obsolete. I reviewed the typical costing system at Swiss Chalet, one of the biggest Canadian restaurant chains. The collected data of this study contains in-depth interviews with employees working with standard costing at different divisions within Swiss Chalet. The analysis about the typical costing in U. K. , Dubai and Malaysia is also used.

First opened up in 1954, Swiss Chalet now has more than 190 restaurants across Canada and United States providing their signature rotisserie chicken and a number of other menu items.

In the start of every month, Swiss Chalet's area manger will send standard costs to each Swiss Chalet's store. The standard costs are produced through historical data and area manager's analysis based on each store's current situation. Then, management in each store can task materials, labor and overhead costs by critiquing the standard costs established for every single of the cost elements. Then computer generate the variances and make managers recognize the differences between the real activities and reference usage and the expected activities and reference consumption. Once the variance is significant, this is a signal for investigation, Managers will try to learn the cause and exert influence to improve it.

Therefore, "cost control and performance analysis" is the primary purpose of Swiss Chalet's Standard Costing System. Matching to Mann-Whitney U test Statistic13, inventory costing is the main element function of standard priced at for sectors in U. K, Dubai and Malaysia. Also, Mann-Whitney U test shows that the industrial-sector companies in U. K. use standard costing to a larger magnitude than the service sector for the functions of cost control and performance analysis, costing inventories and processing product cost for decision making. Also, in mere one occasion has this routine reverted toward the service sector: the utilization of standard costing as an aid to budgeting. These findings are constant with those of other studies of commercial sector companies in Malaysia and the U. K. (Marie & Rao, 2010)

Material Standards:

Swiss Chalet's direct material components have three categories: foods, liquor and disposals. Foods include fowl, potatoes, ribs, and fruit and vegetables. Etc. Liquor includes wines, nature and other non-alcohol drinks. Disposals include food boxes and luggage to cover food. Also, the standard cost of non-value-added materials such as discount materials, food wastes and voidable orders are also included for the intended purpose of reduction or removal. When area mangers determine the typical cost, historical cost, store's current performance and cost-benefit trade-offs are involved in making quality decisions. When all number and price information has been collected, component amounts are multiplied by unit prices to deliver the full total cost of each element. These totals are summed to determine the total standard materials cost of one unit of product and the total standard material cost. Information about direct material of each component, their specs (including quality), their quantities and total standard materials cost are detailed on a costs of materials.

This "average of historic use" method is consistent with information of service industries in Dubai, U. K. and Malaysia. Matching to Mann-Whitney U test Statistic, 76% of service sector in Dubai and 63% of service sector in Malaysia use "average of historic usage" to set up labor and material standards. Alternatively, nearly nine out of 10 industrial sector respondents in Dubai employed standards based on design/engineering studies, which is comparable to Japanese companies in Malaysia (81%). These companies appear to be significantly more methodical in their method of standards setting set alongside the service industries, which mainly used "average of historical consumption method".

Labor Specifications:

The techniques for producing labor standards are similar to those used for materials benchmarks in Swiss Chalet. Swiss Chalet has four types of works in leading of the house: servers, hosts, professionals and bar tenders. There is also three types of people in your kitchen: cooks, brand cooks and pre cooks. The standard costs of each type of staff member in each specific time range are determined. Because they're in the restaurant business, labor necessity is different during the various period of the day. Therefore, their labor benchmarks are specifically recognized in each hour. Their professionals' incomes are also counted in to the labor standard costs although they are fixed over head cost. Labor rate criteria reflect the pay and fringe benefits paid to employees. Because employees in the same position are paid different wage rates based on their encounters in the restaurant business, a weighted average rate is computed and used as the standard. After labor duties are examined, an operations circulation document is well prepared that lists all the necessary activities and labor costs in each time range.

Overhead Requirements:

Swiss Chalet store has two types of over head costs: power costs and maintenance costs. (Managers' incomes are included in the labor costs). Utility costs include hire, gas and hydro, etc. Maintenance costs include equipment repair budget, sanitary service and pest settings, etc. Area managers use historical data, store situation and selling price to determine the over head standard costs.

Swiss Chalet's professionals review the typical every month. Marginally over fifty percent of Dubai market sectors (52%) do reviews semiannually, constant with Japanese respondents in Malaysia (55%). On the other hand, domestic Malaysia firms in the U. K. were likely to review their costing standards annually for a price of 35% and 68%, respectively. (Marie & Rao, 2010)

Material Variance:

Store professionals do the inventory count up weekly and then input immediate materials cost they used of each component, their specs (including quality), their volumes and total standard materials cost in to the computer system. The computer system generates the purchase price variance and quantity variance.

Store managers usually can not do much about the price variance because they're not able to control prices. Head office has purchasing contracts using their suppliers with set prices in the annual basis. Really the only price they can control is veg prices, that have seasonal fluctuation. Professionals have the ability to influence the purchase price in line with the price variance.

Quantity variances are considered the responsibility of the person responsible for your kitchen. When the number variance is too big, managers have to take into account the efficiency of the material consumption, weather experienced employees are well allocated in different change and weather further training should be provided.

Labor Variance:

When employees start to work and when they leave the store, they input their password in to the computer system. Computer system automatically files their working time and creates labor rate variance and labor efficiency variance.

If the labor cost is bigger than 29% of the total costs, head office will give a warning to the stores, challenging them to reduce the labor costs. Therefore, managers have to balance the use of experienced personnel and inexperienced staff in a specific job by using labor efficiency variance and labor rate variance. Using very skilled highly paid individuals for lower-level jobs might lead to an unfavorable labor rate variance, along with a favorable labor efficiency variance.

Therefore, Swiss Chalet examines variance "where the variance exceeds a given percentage of standard". In Dubai, 39% of commercial companies and 50% of service companies bottom their costing decisions on "managerial judgment", compared to roughly half U. K. companies and one fourth of local and Japanese companies in Malaysia. However, 35% of organizations in Dubai's industrial sector and 29% in its service sector clarified when the variance exceeded a given ratio of standard, which is comparable to the rates found in the Malaysia and U. K. studies. (Marie & Rao, 2010)

II Effectiveness and effectiveness of the machine:

The major advantage of standard cost system in Swiss Chalet is that it illustrates and allows management to control by exceptions, that is, it allows management to focus on the areas where there are inefficiencies. It also allows company management to comprehend the quality expected and costs that will be incurred in the planning of each dish and what impacts deviations from these requirements will have on costs and income. If the variance is significant, this is a signal for investigation, Professionals tries to find the reason and exert impact to correct it. Within the Swiss Chalet store I seen, costs are under control; production is high; workers are achieving bonus deals predicated on team activity goals and staff morale is high in a work environment typically considered tedious.

The system is highly manipulated and automated. The process is effective and the benchmarks they set are appropriate and attainably. Although their standards are developed from former and current information, environmental, seasonal and economical factors are considered for the period where the standards are to be applied. Swiss Chalet's materials, labor and over head standard costs are improved every month. For example, just lately, Swiss Chalet taken out many non value added labor actions, their labor time requirements changed very soon accordingly.

Swiss Chalet's requirements can be come to or slightly exceeded approximately 60% or 70% of the time with reasonable work by staff. Their standards allow for normal, inescapable time problems or delays. Their criteria represent an achievable challenge and have the ability to motivate staff' performance with identifying how effectively and successfully workers are performing their duties.

III Suggestion:

Process changes:

Under current system, area managers are the only people who do the standard costs setting. I think that area managers could cooperate with purchasing supervisor, accountants, marketing professionals and store professionals to find out which alternatives are most appropriate. The cooperation will help the company better balance the interrelationship of cost, quality, variety and value.

Under the existing system, standard costs of every type of staff member in each specific time range are used to calculate the full total labor specifications. However, workers salaries will vary even in the same position because their experience are different. Therefore, each individual's salary and individual numbers in one specific time range used to assess the standard labor costs should be recognized for professionals better understand the criteria and better improve their labor design and improve their labor efficiency.

Computer System change:

Swiss Chalet's current computer system is good, but still not highly computerized. They still use fax to transit data and information within the organization aren't highly shared within one website. Therefore, I really believe Enterprise Reference Planning System (ERP) can make their work process more effectively.

EPR system provides a much higher level of accuracy to gathering cost information. With most processing processes being computerized and controlled with little direct labor, ERP system gets the advantage of keeping an accurate record of overhead cost pools by any means levels in an organization. ERP has increased capacity to effectively allocate costs and it is important for developing accurate benchmarks. Standard costs can prepare yourself with, for example, the sub-module mySAP. com Financials under ERP system.

Intermountain HEALTHCARE, Inc. 's Standard System

According to Mr. W. V. Rosqvist's research newspaper "Intermountain HEALTHCARE, Inc, (IHC) Satandard Costing System Methodology and Execution", the IHC Standard Costing System is able to manipulate the task costs at all appealing to provide important groupings for examination. The Standard Costing System provides clinic management with an instrument for meeting increased expense pressures in medical care environment. The machine pays to for prices services, but additionally it is important to monitor productivity and assess costs and profitability.

IHC is a not-for-profit medical center string with 22 nursing homes in the intermountain area and head office is in Salt Lake City. They have a complex approach to determine complete standard costs for each procedure in the hospital. IHC's standard charging system was made to link the hospital's financial management and case mix confirming system to provide significant information in the region of following:

Cost/Revenue Studies: the capability to determine cost and profit at each of levels, such as patient, medical professional, medical specialty, payer and employer.

Marketing: to make complex decisions regarding the competitive market pushes such as costs, contracting and physician retirement. The research gives hospital the benefit to look for the financial impact of changes in size.

Departmental Output: to screen the team performance to help variance examination and goal setting.

Utilization of Medical center Service: the ability to alter usage, which is determined by the capability to analyze current patterns and associated costs.

Cost Assessment: To compare costs to other private hospitals to help professionals to identify and learn the productive methods.

Competitive Research: To study competitor information and make affordable view of its costs. It'll allow a significant view of the impact of price completion on all the competitors. It will help IHC to determine the amount to which it should contend on prices with other nursing homes and with nontraditional health care providers, such as outpatient surgery centers.

The IHC approach to standard costing provides comprehensive costs for each and every individual fee item in a healthcare facility. Fixed and variable costs are retained for every item in wide-ranging categories: labor expenditure, supply expense, depreciation and medical center overhead.

After the execution, their standard costing system is able to: provide full standard fixed and variable charges for management purpose to make prices and marketing decisions; maintain a management reporting system compatible with existing system; provide an method of compare clinics and departments; provide accuracy while allowing easy and speedy maintenance. (M. V. Rosqvist)

The Future of Standard Costing:

According to Cheatham and Cheatham (1996), many accountants do not know a redesigned standard priced at system can provide the important information that they need and upgrading their system can be an easier process than implementing a new system. In addition they explain that standard costing system combines managerial, financial and procedures accounting, which make it as a control system. However the possible replacement is merely cost accumulation system.

Critics against the typical costing system questioned whether the system is useful in the creation system of today. Even as proven above, it is still a trusted method, due to the fact that it offers cost information for many various ways in addition to cost control. A whole lot of companies modified their standard costing system to report on these parameters that especially important to them. In companies where an activity-based system is integrated, standard costing continues to be essential as it pertains to controlling the costs of unit-level activities.

Other criticism comes from that overemphasis is on the purchase price and efficiency, which would make quality away. Also, quantity variance to evaluate utilization of capacity ignores overproduction and needless build-up of inventory. In this situation the actual fact that variance examination is not "locked in" to a set of variables is dismissed. Used variables can be changed when the necessity arises. Types of this are provided below. (Cheatham & Cheatham, 1996)

To use expectations on the functions of uncooked material purchasing and inventory levels, which give information about the potency of suppliers. As the objective is to deliver orders as put, any variances are undesired.

Price variances can be coupled with an excellent variance to avoid purchasing managers from only concentrating on price but do not pay attention to quality.

Raw materials inventory variances reveal an inventory build-up, because more material purchased than used, by reverted conditions. That is consistent with a just-in-time theory.

Further criticism is approximately the non-focus of continuous improvement. But, specifications based on engineering studies or historical data aren't a necessary part of a typical costing system because benchmarks can be modified by a whole lot of methods. Instances are shown as below. (Cheatham & Cheatham, 1996)

Use last period's results as criteria. The very last period's result needs to be representative; otherwise it needs to be modified. It is also achievable to use a base period that evaluations are made.

Use benchmark as something outside companies. To equate to opponents or with the leader of the industry.

Use predetermined cost lowering by reducing the typical cost for each and every period by way of a predetermined total achieve continuous improvement.

Finally, the confirming system of the typical costing system may be modified. In the traditional way internal completion often arises. By revising the reporting system, co-operation among workers, professionals and departments can be backed.


Despite it is less relevant than newer accounting methods, standard costing is definately not obsolete. However, redesign and revise the standard costing system to adjust the new environment may be necessary. Due to its simplicity, versatility and affordability, standard costing remains a popular cost accounting method among accounting and money professionals.

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