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IMPLICATIONS OF STANDARD COSTING SYSTEM IN MANUFACTURING: A

CASE STUDY

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 IMPLICATIONS OF STANDARD COSTING SYSTEM
IN MANUFACTURING: A CASE STUDY
Paul Eisenberg, LLM, EA, CFE, CPB
Derby Business School
University of Derby, United Kingdom

Introduction
162 The case study addresses the following scenario:
Given deteriorating sales revenues over the period 01.03.2014–28.02.2015 the
Operations Manager (OM) of ASL states that the standard costing system improperly
addresses actual business requirements. The OM acknowledges that the standardization
or “McDonaldisation” of production processes at ASL has led to cost savings.
However, he considers steady improvement and servicing individual customer demand
to be thwarted by the standard costing system. In the OM’s opinion this finally results
in loss of sales revenues. In order to assess the OM’s view, the Chief Financial Officer
(CFO) of ASL asks for a critical evaluation of the limitations and benefits of the
standard costing system and for suitable recommendations.
The case study is produced using scientific literature on management accounting.
The sources used can be verified through the list of references attached to the case
study.

Findings
Description of the standard costing system
Under this system, standard costs for material, staff and other expenses are
established based on management estimates of prices, the materials and labor usage as
well as budgeted overhead costs and production volume (ACCA, 2011a).
These standards can be used for inventory valuation and compared to the actual
costs (Sangster and Wood, 2013). The variances, i.e. the differences between the
standards and the real costs can be analysed for cost control reasons, performance
evaluation and pricing (Dyson, 2010).
Benefits of the standard costing system
There are certain benefits to consider (ACCA, 2012):
- appropriate standards can enhance the budgeting,
- suppliers can be changed and better materials and processes introduced in
order to meet costs objectives,
- management and staff can be motivated to reduce the adverse variances
through increased efficiency and cost-control,
- “management by exceptions” allows to take action only if variances move
beyond acceptable limits, thus saving management time and costs,
- standard costs datasheets can speed up inter-company reporting and decision
making (Sangster and Wood 2012).
Limitations of the standard costing system
However, standard costing comes at it costs (ACCA, 2012):
- some costs are non-controllable or can be set too high to be achievable thus
resulting in demotivation of staff if held accountable for adverse variances,
- standards can be manipulated to achieve positive variances, for example by
estimating too high costs to achieve beneficial cost savings; such manipulations would
undermine control efforts,
- standard costing allows for idle time and waste which is at odds with modern
production methods like Juts-In-Time and Total Quality Management (TQM) (ACCA,
2011b).
Business requirements of Active Sport Life
This case study focusses on the following objectives addressed by OM:
- “continual improvement”, 163
- “responding to individual customer needs”,
- “customer service and individuality”,
- cost reduction,
- sales growth.
How does the standard costing system address these requirements?
The company should strive for financial as well as operational improvement.
Financial improvement can be achieved via standard costing through better cost
controls (Bhimani et al., 2013).
Regarding operational improvement, the modern TQM focusses on the customer
relationships instead of production processes (Boniface and Augustine, 2013).
Efficiency is not measured by output, but by customer complaints, returns and re-
working (Nath De, 2010). Thus, from the TQM point of view, improvement is
achieved if customer needs are met better and better (ACCA, 2011b).
According to the OM, cost cuttings were achieved to the detriment of customer
service. This contradicts the TQM philosophy.
However, the success of ASL depends on its strategic approach. If it is to follow
the cost leadership strategy the company should go on focusing on cost reduction
(Porter, 1998). This would be meaningful if the company were manufacturing mass
products where profound customer service is not key (Johnson et al., 2011). However,
if the company chooses a differentiation strategy, it is supposed to meet the customer
needs in a way that is different from and better than that of its competitors (CMA,
2010). This approach is valued by the customers and allows the company to charge a
price premium (Porter, 2004). Responding to customer individuality (as mentioned by
the OM) might be such an approach, especially in fashionable female sportswear
market.
But if following both the strategies, business organizations usually struggle. It
proves difficult to save on costs and to provide distinct products or services of above-
average value at the same time. Such companies become “stuck in the middle”
(Johnson et al., 2011).
The reduced sales revenue of ASL might be an indication of this. The OM
describes its cost reduction efforts as “McDonaldisation”, i.e. a highly standardized,
albeit cost efficient production process of uniform goods (Alfino et al., 1998). Thus,
customers used to have their individual needs to be considered are faced with a low
cost policy resulting in poor service. Consequently, they refrain from buying at ASL.
From this viewpoint, standard costing does not provide ASL with the means needed to
retain and increase sales revenue.
 Conclusions and Recommendations
A cost leadership strategy can be adequately served by standard costing given its
strong cost control abilities. In case of a differentiation strategy business success does
not depend on cost reductions only, with adverse outcomes as a consequence if
standard costing is relied upon. This is all the more the case in a business environment
that is not stable and predictable (CIMA, 2008) like female fashion.
The OM’s statement implies that ASL should follow a differentiation strategy
164 servicing customer’s individuality. In this case, standard costing should be retained as a
starting point to assess and control costs of production and to enhance manufacturing
efficiency (Lukas, 1997). In the next step the whole value-chain is to be analysed to
assess non-productive activities which create value (Hansen and Mowen, 2006), with
customer service playing a central role for ASL. Activity Based Costing can then be
used to allocate the costs of servicing clients to the particular product (Atrill and
McLaney, 2010). This would help to adjust costs and allow a refining pricing of
products. The preservation of value creating service activities along with appropriate
pricing should help to increase sales again.

References
Agree, D. (2011), “Slim and America Movil Made Waves in 2010”, Latin Trade 19
(1), pp. 54-56
ACCA (2011a), Management Accounting, BPP Learning Media Ltd, London.
ACCA (2011b), Performance management, BPP Learning Media Ltd, London.
ACCA (2012), Business analysis, BPP Learning Media Ltd, London.
Alfino, M., Caputo, J.S., Wynyard, R. (1998), McDonaldization revisited: critical
essays on consumer culture, Greenwood Publishing Group, Westport.
Atrill, P. and McLaney, E. (2010), Accounting & Finance for Non-Specialists,
Financial Times Prentice Hall, Harlow.
Bhimani, A., Horngren, C.T., Datar, S.M. (2013), Management and Cost Accounting.
Financial Times Prentice Hall, Harlow.
Boniface, U.U., Augustine, O. (2013), “Advanced Manufacturing Technology: A
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Accounting, Vol. 4 No. 1, pp. 90-96.
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Management Accountants, available at: http://www.cimaglobal.com/
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s_mar08.pdf.pdf (accessed July 25, 2016).
CMA (2010), Performance Management and Performance Measurement, Certified
Managements Accountants of Ontario, available at:
http://www.cmaontario.org/portals/2/media/members/PDFs/Marketing/2011Perf
ormanceManagement.pdf (accessed July 25, 2016).
Dyson, J.R. (2010), Accounting for non-accounting students, Financial Times Prentice
Hall, Harlow.
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IMPLICATIONS OF STANDARD COSTING SYSTEM

IN MANUFACTURING: A CASE STUDY
Paul Eisenberg
University of Derby, United Kingdom
Abstract
The case study was carried out in the field of Management Accounting and
Performance Evaluation at the University of Derby, United Kingdom. The purpose of
the case study is to critically evaluate the implications of retaining the standard costing
system at the female sportswear manufacturing company Active Sports Life (ASL) and
to make relevant recommendations. The paper shows that management accounting
processes have to follow company strategy in a given business environment. A
combination of management accounting instruments can prove successful to save on
costs, to retain valuable goods and services and to remain competitive through
appropriate pricing.
Keywords: cost leadership strategy, differentiation strategy, standard costing,
value chain, activity based costing

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