Chapter One
1.3 PURPOSE OF THE STUDY:
While carrying out this research, tow broad aspects are borne in mind, which includes:
- Establishing a framework that would guide accountants and managers in the employment of standard costing.
- To know the extent standard costing principles adopted are used in practice in Nigeria business management.
The emphasis has been placed on the employment of the techniques as a tool of management toward profit orientation and to be an integral body of business management. The various uses of the object of this research work, in effects, it is to identify the possibility of standard costing or profitability and managerial effectiveness and their possible relationship. Provide possible solutions and based on the findings, make recommendations for effective management.
CHAPTER TWO
REVIEW OF RELATED AND RELEVANT LITERATURE
2.0 INTRODUCTION
The aim of literature review is to assist the researcher in understanding the existing work of other researchers in the area of research, provide a theoretical substance of the study, substantiate the existence of the research problem, support the proposed study as one that contributes something new to the existing knowledge base and develop a validated framework of the study (Ridley, 2012). This chapter will establish the relationship between standard costing system and cost control. Challenges faced in the management of costs and problems related to the implementation of standard costing system will be deliberated in this chapter. How the system is used to control costs effectively and a justification for its implementation within the motor industry will also be discussed in this chapter.
2.1 STANDARD COSTING SYSTEM AND COST CONTROL
According to Periasamy (2010), organisational success relies greatly upon effective and efficient cost control. Cost control essentially consists of all the methods installed in an entity with the objective of curbing increases in the costs related to operational activities so that the costs do not exceed the anticipated levels (Klychova et al, 2014). OCNEANU et al (2012) further noted the relationship of standard costing and cost control when they said that standard cost method considers future business activity and standards are regarded as measuring instruments of control and management activity. Siyanbola et al (2013) further argued that cost control and costing systems are tantamount with similar features and argued that costing system comprises of an organisation’s control, plans and structures which consists of the setting phase, the operation phase and the feedback phase.
When setting up a system that controls costs, firstly there is the establishment of standards that would be used to administer the performance levels of resources and these standards can be expressed in numerical terms (Horngren et al, 2012). Administering of the resources to meet the set cost standards signifies cost control. For example, in the motor industry standards can be established in units of spare parts to purchase, expected labour hours from technicians, expected turnaround time on vehicle service, vehicle sales figures.
Operation phase deals with the various tactics used by the entity to ensure that the set standards are achieved. The firm effects policies that encourages the implementation of the set goals during operations. Action is noticed during this phase, with all departments within the firm working in line with the standards set and management in all centres controlling the occurrence of the activities during operations. The operation phase thus relies greatly on the completion and success of the setting stage. De Waal (2013) is of the opinion that if the standards are unclearly established, even when the tactics taken up are good, it would be difficult to realise results because results depend on a clearly defined point of measurement.
With the feedback stage, information pertaining to results is reviewed and decisions for improvement of the system are made. Whilst the implementation of tactics in undergoing, the flaws with the system (be it the problems with setting standards or implementation) are recognised and documented so that the corrective actions decided upon would be comprehensive (Drury, 2013). The corrective action is communicated to all personnel related to the system’s implementation (Laurie, 2013). The efficiency level in cost control improves with the continuous measurement of actual results against expected results and analysing the variations thereof (Jordan, 2011). When the feedback phase elapses, the process starts again from the setting phase but this time the standards set would be the revised results reviewed in the feedback stage. Management is key to the achievement of an effective feedback phase since it has the duties of organising and coordinating communications within the entity.
Therefore, to effectively control the costs of an entity, there is need of a system that has established criteria of controlling and reducing costs. The need for cost control resulted in the implementation of standard costing system within the motor industry (Long Ho, 2011). This is mainly because a standard costing system consists of similar stages of setting, operation and feedback. According to Drury (2013), standard costing is regarded as a method that forms expected cost targets and matches the pre-set costs to the real costs that accumulate in operations. Standard costing has been appreciated as the most effective means for cost control and it is still being widely used in various industries throughout the world (Marie et al, 2011; Badem et al, 2013).
In cost control, management develop standards on costs and/or the predicted cost values, and analyse these estimated costs versus the actual costs. Through the use of standard costing system, automobile firms can detect the departments that are consuming more costs in operation than the budgeted values. Standards are set for labour hour targets, motor vehicles throughput figures and acceptable wastages in servicing motor vehicles. When there is competition in the economy, the custom of measuring production efficiency can be regarded standard cost (OCNEANU et al, 2012). According to Horngren et al (2012), the standard cost approach denotes that standard costs are regarded as the real operational costs before operations are complete. Rajan et al (2015) argued that costing calculation as a whole commonly comes down to standard costs which are widely used as a base for setting selling prices. The deviations of actual costs from standard costs provide information useful to management in making cost related decisions.
According to Bhimani et al (2015), cost control is an exercise done by management of managing the expenses of a business through the comparison of actual financial results with the budget upon which the resource allocation was based, and analysing the variance. Jordan (2011) argued that variance analysis is only made on significant deviations and it is based on responsible centres and communicated to appropriate personnel for corrective action.
Siyanbola et al (2013) argued that cost control is stemmed from budgeting and team work. Budgeting has its weakness of consuming production time, and if done frequently, the time consumed may result in a significant opportunity cost for the business. In the motor industry, production time wasted results in poor service delivery due to increases in the turnaround time. Poor service delivery pushes customers away and the sales volume of the automobile firm fall. On the other hand, team work requires a motivated workforce. When the employees are demotivated, team work is rarely achieved yet it is the backbone of effective cost control (Datar et al, 2013). Therefore, for budgeting to be effective, team work is needed. The relationship between these two is fundamental in effective cost control in the motor industry. Since the implementation of standard costing system to control costs of an entity calls for effective communication and coordination within all departments of an entity, it becomes the objective of management to keep all departments working together in adherence to set standards so as to achieve effective cost control and profit maximisation.
2.2 COST MANAGEMENT CHALLENGES
In the midst of ensuring adherence to standards by monitoring and coordinating activities within the entity, management is exposed to resistance from employees among other challenges. Becker et al (2013) postulates that the most successful companies have the highest level of integration of people involved in the processes aligned to enable business profitability and as such resistance of employees discourages business success. Cost management is an exercise done by management of managing the expenses of a business through the comparison of actual financial results with the budget upon which the resource allocation was based, and analysing the variance (Horngren et al, 2013). Furthermore, Jordan (2011) argued that variance analysis is only made on significant deviations and it is based on responsible centres and communicated to appropriate personnel for corrective action.
Challenges faced in cost management often arise when there is no costing technique under implementation to monitor costs or when the effected costing system is not being used appropriately or effectively (Horngren et al, 2012). In addition, Periasamy (2010) asserted that in an entity with a goal of profit maximisation, there is more likelihood of finding a costing technique under implementation to monitor and reduce costs. Therefore, since the case study firm has a profit maximisation motive, it has standard costing system under implementation.
Ngozi (2013) noted that the inappropriate implementation of a costing technique results dominantly in cost management problems. De Waal (2013) postulated that there is need for educating all employees of an entity about an installed costing system for the system to produce desired results. Educating employees can be through seminars or workshops. Management itself should be well versed with the costing system that it has implemented (Datar et al, 2013). Standard costing system is a costing system that needs to be known thoroughly before it can be effectively implemented to positively reduce costs. According to Badem et al (2013), challenges with the implementation of standard costing system are synonymous to challenges faced in cost management within an entity that uses standard costing system in cost control.
Kaplan and Atkinson (2015) noted that there are ideal standards, basic standards and expected standards. Expected standards are based on expected performance and these are often attainable because they are based on information received from the workers who have on-hands experience. However the other standards lack consultation in setting them up. Failure to set appropriate standards due to lack of consultation leads to increased wastages by workers in operations which ultimately increase operating costs. Variance analysis to correct adversities caused by such would not result in positive results. Laurie (2013) supported this when she noted that workers have a tendency of being reluctant to increase their effort when management excludes them in planning for matters that concern them. According to Heizer and Render (2014), the operations management play a key role in effecting policies that govern the flow of inventories to and from an organisation since a firm can only handle a certain quantity of inventory at a time. This means that when there are standards for the quantity of spare parts that the automobile firm should store, there should be policies implanted so as to ensure that the standard inventory level is maintained. Ineffective policies for operations might lead to ineffectiveness of cost management since more inventory trigger more storage costs and less inventory causes stoppages in vehicle service which results in lost sales. Galbraith (2015) is of the opinion that to keep up to date with dynamics of industries, management should be flexible and innovative in policy setting.
Poorly motivated staff discourage teamwork which causes coordination problems in an entity (Laurie, 2013). In an automobile firm, if the workforce is demotivated, coordination amongst departments lacks which causes additional operating costs such as telephone charges. An example is the accounts and sales departments, when there is no coordination between these departments, debt collection from customers gets costly due to further calls that one of the two departments makes in the case that the debtor has queries with his/her account balance. De Waal (2013) postulated that management has the obligation of monitoring company performance in a way that increases the motivation level of employees.
A motivated workforce works as a team, and teamwork is recognised by Anderson et al (2013) as a fundamental in effective cost management. Further research has also opined that team work requires a motivated workforce. Management thus has to regularly sacrifice costs relating to employee fringe benefits, involving workers in budgeting, holding periodical parties for targets achievement among other efforts to motivate its workforce (Hanfy, 2013). Modern day managers, who are often supervising considerably more individuals now the earlier managers did, are delegating more tasks and responsibility to subordinates, which is commonly called employee empowerment (Malone et al, 2013). Furthermore, Malone et al (2013) argued that more employees find themselves with increased accountabilities, and managers act as coaches who assist employees to solve problems, as compared to being decision makers who issue commands and monitor compliance, and this empowerment of employees leads to staff motivation.
Allocation of work to employees is another challenge faced in cost management. Sometimes allocating a heavy workload on employees individually exerts pressure on them, regardless of expected attainable standards set at start, they become unattainable in the process (Weygandt et al, 2015). In the motor industry, poor work allocation by management leads to rushed jobs which are often defect jobs. Defect jobs increase customer complaints and they have to be redone at zero charge. This causes unplanned additional costs.
For cost management to be effective, there is need for timely feedback for corrective action to be done (Horngren, 2012). Management should educate workers on the essence of effective communication within the entity as it is key in cost management. When feedback is received late, the corrective action plan decided by management would have less value in correcting the adversities since the motor industry is regularly evolving. In support of this, Galbraith (2015) said that what is regarded as innovation in industries today, needs revision tomorrow. In the motor industry, production time wasted results in poor service delivery due to increases in the turnaround time. Poor service delivery pushes customers away and the sales volume of the automobile firm decline.
In some cases, feedback is received in time from employees but management takes time to decide on the corrective action. In fast changing economic conditions, the effects of delays in correcting deviations from planned results in ineffectiveness in cost management. Management should do periodical checks of progress through analysing weekly, monthly or quarterly reports on operational performance and set periodical dates of analysing reported variances (Datar et al, 2013).
Cost management is also hindered by the weaknesses associated with the implemented cost control system. Badem et al (2013) noted that even if standard costing system is still widely used in industries as a cost control tool, it has some weaknesses related to its implementation.
2.3 STANDARD COSTING IMPLEMENTATION PROBLEMS
Effective implementation of standard costing system technique is subject to the business environment. Democratic or participative style of management and periodic performance evaluations are necessary for standard costing to effectively control costs (Periasamy, 2010). Commitment should be noted from both the management and the employees in working as a team towards the achievement of targets. Marie et al (2010) argued that performance checks through performance appraisals play a vital role in the management of the cost control system as these provide management with more accurate information of the employees’ performance. The shortage of either of these requirements distress successful implementation of standard costing system. Standard costing system is difficult to implement in line with job processing where each job would be having a distinct cost due to job specifications (Drury, 2013). However, in the motor industry, jobs on customer vehicles are recognised as batches of either minor service or major service. The procedures carried out on each job, whether major or minor, would be known, structured and fixed, and standards can be easily set for work and variations analysed. It is in this regard that, for effectiveness in cost control and profit maximisation at large, an entity should appropriately implement standard costing system. According to Datar et al (2013), implementation challenges often arise in the various stages of the standard costing system set up, that is, either during set up of standards, following through operations to confirm adherence to plan or during feedback stage.
Time consumption in standard setting especially when there is consultation of employees is one of the problems encountered in standard costing implementation (Long Ho, 2011). Standard setting on its own is an exercise that requires technical skills (Klychova et al, 2014). In an automobile firm, the technicians in the workshop are the ones with the knowledge of labour hours needed to complete a job because of their working experience. Developing a reliable standard that is achievable will consume time. This time used up in standard setting may imply an opportunity cost for vehicles that the automobile firm could have sold or serviced. According to Bhimani et al (2015), standard setting and revision of standards is commonly done in periodical intervals of six months or yearly so as to reduce time wastages and costs related thereto.
Some standard costing systems are very intricate, therefore they are not well understood by responsible management and the employees (Cunningham et al, 2014). For that reason, the implementation of standard costing system gets difficult. This persuades for staff training before proper implementation, and results in increased operating costs. Ultimately, the standards will not be achieved and the main objective of cost control will not be fulfilled. For workers to attain the set standards, there is need for management to educate them of the strategies which they should adopt in doing work (Horngren et al, 2012). These strategies might be making job follow through in an automobile firm, whereby the mechanic who has attended to a problem on a customer vehicle, proceeds to test drive the vehicle himself/herself rather than having another person do it.
Standard setting can be subjective which makes standard setting difficult for management which is constituted of individuals with various standpoints (Weygandt et al, 2015). An organization can adopt various standards and these include; basic, theoretical, and achievable standards (Drury, 2013). Henceforth, what is defined as a standard in an entity rests on its management philosophy and that shows the subjectivity behind (Periasamy, 2010). In the motor industry, an area that is often subjective in standard setting is the expected labour hours from technicians. When standards are achieved, management can further revise the standards till they get to a point that ensures profit maximisation. Without prior consultation, standard costing implementation would not effectively produce desired results (Weygandt et al, 2015).
Marie et al (2010) noted that with a fast changing business environment, standards tend to get obsolete. OCNEANU (2012) defines standard costing as a system of cost accounting that is designed to find out the cost of a product under the present conditions. When the conditions are not current, the accuracy of standards is distracted. This also implies that when standards are set based on the present conditions, and those conditions change before the end of the assessment period, the originally set standards become obsolete. When the standards are obsolete, they maybe be an ideal reflection of the wanted results but they would not be achievable (Ngozi, 2013; Marie et al, 2010). Revising the standards to match with the change in conditions, results in increases in costs of administration and other expenses related to standard setting and revision. It becomes a challenge that when the business environment is frequently changing, standard costing becomes an ineffective and costly tool to implement in cost control (Badem et al, 2013). With the competitive nature of the motor industry in Zimbabwe, business environment conditions change regularly and that results in the set standards of an automobile firm obsolete, resetting of standards results in additional costs. Often times these additional costs would not be planned for by management.
After poor implementation of standard costing system, workers’ motivation declines, management lose control over costs and profit maximisation becomes unachievable (Periasamy, 2010). The problems relating to the implementation of standard costing system would require management in its capacity to address and solve them so as to enhance effective cost control.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to examine the impact of standard costing on profitability and management effectiveness on a manufacturing industry.
Sources of data collection
Data were collected from two main sources namely:
- Primary source and
- Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information which will aid to examine the impact of standard costing on profitability and management effectiveness on a manufacturing industry. Two hundred (200) respondents were randomly selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
4.1 Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Introduction
It is important to reiterate that the objective of this study was to examine the impact of standard costing on profitability and management effectiveness on a manufacturing industry.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in examining the impact of standard costing on profitability and management effectiveness on a manufacturing industry.
Summary
This study was undertaken to examine the impact of standard costing on profitability and management effectiveness on a manufacturing industry. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and tested the hypotheses using the chi-square statistical tool. While the fifth chapter gives the study summary and conclusion.
CONCLUSIONS AND RECOMMENDATION
The standard costing as a tool either improves or not improving profitability and managerial effectiveness. Unlike its contemporaries in the field of science, it deals with human beings and calculating significant information. Standard costing as a long established concept is the management function of planning and control. In effect, yardstick has been of vital importance for planning and control exercise. As a matter of facts, problems associated with production and earning a profit was recognized for many years before the concept of standard costing was invented.
The researcher categorised the recommendations in the three phases of the cost control using costing systems (setting, operational and feedback phase) that were noted by Siyanbola et al (2013) so that each recommendation can be easily linked to the each phase in the implementation of standard costing system by the company.
The Setting phase
Management should encourage participation of employees in the setting of standards since they have hands on knowledge as to the practicable targets (Weygandt et al, 2015). Consultation in standards setting also assists in motivation of workers as they start to feel more responsible of the company’s future. Stefanovic et al (2011) also postulates that highly efficient coordination of all functions in an entity results in profitability.
According to Hanfy (2013), a company management should establish a standards committee to avoid frequent standards setting. This committee carries out industry trend analysis so as to come up with standards that can stretch through an operational period.
The Operational phase
Management should push for an alteration in the centralisation policy of the company, the organization can be more responsible for the approaches used in making sure that targets are met. Malone et al (2013) said that when an entity faces high communication costs, the best way to make decisions is through independent decentralized decision makers who are at the ground.
There should be proper communication of the essence of staff training so that when staff goes for training, their contribution to the firm’s performance can be noticed.
When staff is well trained, there will be less fault jobs and the company can save on costs of zero charged jobs. Horngren et al (2012) believes that management should train employees so that their efficiency in doing work is enhanced.
The Feedback phase
Management should communicate in time their view on the business reports such as management accounts, weekly cost reports, throughput reports and stock valuations after stock takes submitted to them so that corrective action is done in time. Kaplan and Atkinson (2015) noted that communication channels have a bearing on performance level of a company.
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