Modern managers have come to establish cost accounting's feasibility. Consequently, it enables one to comprehend the costs associated with operating a business. According to numerous researchers, cost accounting originated during the industrial revolution. During this time, the challenges of operating a huge organization led to the development of cost recording and tracking systems.
These approaches were advantageous as they ultimately assisted the leaders of large businesses in making sound decisions. Regarding the early industrial age, the expenditures borne by entities can be characterized as variable costs today. This is due to the fact that their variance was precisely proportional to their output. During this time, managers used the production's variable cost totals as a guide for their decision-making processes.
Cost accounting is an important component of management accounting, and as such, it should be carefully considered. The standard cost is one of the key expenditures connected with production. Standard costing, according to Drury (2007, p. 44), is a procedure that involves the development and utilization of the costs employed in the process of producing goods and services under typical operating conditions. The manufacturing costs evaluated in cost accounting are typically estimations.
According to Bragg (2002, p. 40), standard costs may not necessarily correspond to the actual expenses incurred during the production process. Consequently, accounting professionals are responsible for calculating the differences between actual and standard expenses. In addition, the variation must be included to the cost of products sold.
Regarding standard cost accounting, the focus of this study will be on recognizing some of the issues that can arise when cost accounting is practiced. In addition, the article will identify an approach based on the balanced scorecard technique and define its benefits. This article's Part B will focus on accounting calculations designed to demonstrate if a new product can provide the desired net cash flow. Moreover, the time required to complete a second unit based on specified learning rates.
Problems with standard pricing
Standard pricing and lean manufacturing
Standard costing is incompatible with lean costing. Standard costing, in addition to being inefficient, is viewed as inefficient and ineffective by organizations that adopt lean production strategies. Lean production implies producing below an entity's maximum capacity. The incompatibility of standard cost accounting with lean manufacturing stems from the fact that the evaluation of standard costing under traditional costing was designed to only support full production and not underproduction.
In spite of lean production's less-than-full-capacity output, businesses who employ it nonetheless earn a profit, which results from the presence of a bigger flow considering the volume produced with the same resources. Standard costing measurements tend to concentrate on variables such as departmental budgeting, machine use, and labor efficiency, among others. In contrast, cost measurement in lean production focuses on value stream, first-time quality, and throughput, among other characteristics of lean production.
The concepts of standard costing are most effective when resources are utilized to their fullest extent and manufacturing takes full advantage of available capacity. On the other hand, lean manufacturing concepts are most effective when the reverse of normal cost principles prevails.
Optimism regarding standard pricing
The presence of ideal cost inside conventional costing highlights its optimistic nature. In order to achieve full capacity, it is important, according to optimum cost, to eliminate wastes and inefficiencies as well as any other types of obstacles. In terms of the actual industrial process, various obstacles are occasionally encountered. According to Maskell & Bruce (2004, p. 27), these impediments are viewed as cost-cutting motivators and are deployed by certain organizations as a means of disciplining employees. Consequently, the innovativeness and self-esteem of the employees are diminished. Physical assets and manufacturing machinery can never choose to oppose the company's mass production and efficiency objectives, but people can.
Consequently, normal costing tends to disregard the demands of the workforce. This strategy focuses solely on using entrepreneurial skills in order to develop profitable strategies. The use of budgets as tolls for establishing each day's expense levels is indicative of managerial myopia. This is conclusive evidence that conventional costing leads to unqualified decisions in the future.
According to Kaplan & Robin (2012, p. 7), there is no provision of information necessary for regulating overhead and other indirect expenses in order to adhere to the established production policy.
Standard pricing is prioritized over statistical applications.
The predefined costs consist of standard and projected costs. According to Gupta (2006, p. 46), standard costing is dependent on both statistical data and method, which are employed as cost management indices. In addition to being highly subjective and relying on the experience and intuition of the entity manager, anticipated costs also exhibit a significant degree of subjectivity. Therefore, according to Tyagi & Praveen (2008, p. 23), there are competing boundaries between these two costs. Consequently, the process of policy implementation becomes difficult to manage.
The inability of management to establish a company-wide strategy is deduced from the fact that standard costing prioritizes statistical variations. Rather, they adopt localized techniques that are less significant.
Balanced Scorecard methodology
A balanced scorecard is a strategic performance management instrument. Typically, it is identified as a report with a semi-standard structure. However, it is supported by automation tools and established design methodologies. In organizations, task managers use a balanced score card to document the completion of tasks, typically by personnel under their supervision, as well as to monitor the outcomes of those actions.
Advantages of a scorecard-based strategy
The application of a balanced scorecard methodology generates a balance inside the entity. Instead of focusing solely on the financial component of an entity's performance, a balanced scorecard method ensures that all aspects of the entity's performance are considered. In addition to financial indicators, a balanced scorecard method takes into account personnel development, process efficiency, and customer satisfaction. This, in turn, prevents the potential problems that can arise when one area is enhanced at the expense of another (Kammerer 2008, p. 15).
A scorecard-based strategy is noted as having the benefit of being scalable. Consequently, the same metrics can be applied at several operational levels to evaluate the performance of an entity.
Consider the customer
The adoption of a scorecard-based methodology enables management of an organization to obtain insight into the client experiences. The measurements in the areas of growth and development are crucial because they provide information about customer satisfaction. This information influences the retention of clients, and as a result, an organization maintains or enhances its profitability and productivity.
A method based on score card methodology enables a manager to transition from reactive to proactive behavior. Such an approach includes both outcome measures and metrics that provide insight into ongoing performance, in addition to output-influencing drivers. Therefore, managers of an entity are able to keep awareness of performance levels and any difficulties that may emerge, allowing them to develop strategies geared at reducing the effects of these issues (Bhattacharyya 2012, p. 40).
y = n = learning curve
Where y=average unit cost
a=price of the first 1400 units.
x = Total number of manufactured units
b = Learning factor (log LR divided by log 2)
LR = learning rate expressed as a decimal
LR=Log 0.75/Log 2
The learning factor (b) is equal to -0.3219 for a learning rate of 0.75 (75%).
2, 750 units
(2,750 units x £650)
Materials direct (W1) £495,000
Direct Labour (W2) $ 333,280.56
Variable expenses amount to £133,312.2
Cash Flow Net: £ 825,907.20
Optimal cash flow is £550,000
The new product will generate the desired net cash flow, inference.
Direct material £495,000
For the initial one thousand four hundred Units, y=
Total cost for the first 1400 units is £200.3603992449024 multiplied by 1400, which equals £280,504.56.
All more units will have the same price as the 1400th unit. To calculate the price of the 1400th unit, one must subtract the price of the 1399th unit from the price of the 1400th unit.
For 1399 items, y =
y = 4,050 x 1399 -0.4150
Total cost for the first 1399 units is £280,387.33 (£200.42 x 1399).
£117.28 is the price of the 1400th unit at £280,504.55894286337 minus £280,387.3307311298.
Cost total for the twelve months of production
£ 80,504.56+(£117.28 x 450) =£333,280.56
The variable overhead costs are calculated at £3.60 per hour of labor, or 40% of direct labor.
0.4 x £333,280.56
Variable expenses equal $133,312.22
Question No. 2
Calculate the time required to complete the second unit if the actual rate of learning is;
Time for first batch of 450 1400 Units
Average time for the two batches at 65%, 450 multiplied by 0.65 equals 292.5
Total time for the two batch units
2 x 292.5 = 585
Time for the second batch unit
585– 450 = 135
Time for initial Unit batch of 450
Average time for the two unit batches at 85%, 450 multiplied by 0.85 equals 382.5
Total time for the two batches of units is 2 x 382.5 = 765
Time for second batch unit 765 – 450 = 315
Inference: The learning rate of 65% indicates accelerated learning. This is because, relative to a learning rate of 80%, the time required for two following unit batches is drastically decreased.
This analysis demonstrates that traditional cost accounting is detrimental for measuring the financial performance of an entity. Many scholars have determined that this method is incompatible with lean production. Standard costing stands in opposition to the lean production principles. This research also determined that typical costing was overly optimistic. Additionally, traditional costing methodologies tend to concentrate more on statistical applications (Walsh 2003, p. 37).
An strategy based on a balanced scorecard is an effective method for measuring performance; hence, many managers prefer to utilize it. Among the benefits of this type of strategy are scalability, balance, customer-centricity, and proactivity (Gummesson 2001, p. 435). This research also determined that a new product may or may not achieve the required net cash flow. This is contingent upon the direct materials, direct labor, and variable overhead costs ascribed to the new product. The sum of these three figures is then removed from the anticipated sales of the new product before being compared to the desired net cash flow.
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