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Standard Costing and Variance Analysis

INTRODUCTION

'The planned unit cost of the product, component or service produced in a period is known as standard
costing. The standard cost may be determined on a number of bases. The main use of standard costs is in
performance measurement, control, stock valuation and in the establishment of selling prices.’ CIMA Official
Terminology, 2005
Variance analysis
‘The evaluation of performance by means of variances, whose timely reporting should maximise the
opportunity for managerial action.’
CIMA Official Terminology, 2005
Overview and comparison
Standard costing is a control system that enables any variances from standard cost or budget to be analysed in
some detail. This allows for more effective cost control.A standard costing system consists of the following
four elements:
1. Setting standards for each operation.
2. Comparing actual with standard performance.
3. Analysing and reporting variances arising from the difference between actual and standard
performance.
4. Investigating significant variances and taking appropriate competitive action. Standard costing and variance
analysis application
Standard costing
This is generally best suited to organisations with repetitive activities. It is probably most relevant to
manufacturing organisations with repetitive production processes. Standard costing cannot be applied easily
to non-repetitive activities because there is no clear basis for observing and recording operations. It is difficult
to determine a clear standard.

Two commonly used approaches are used to set standard costs.


1. Past historical records can be used to estimate labour and material usage.
2. Engineering studies can be used. This may involve a detailed study or observation of operations in terms of
material, labour and equipment usage. The most effective control is achieved by identifying standards for
quantities of material, labour and services to be used in an operation, rather than an overall total product cost.
Variances from standard on all component parts of cost should be reported to identify the cause – and
ultimate responsibility – for the variance from standard.
Variance analysis
Variance analysis involves breaking down the total variance to explain:
1. How much of it is caused by the usage of resources differing from the standard
2. How much is caused by cost of resources differing from the standard Together, variances can help to
reconcile the total cost difference by comparing actual and standard cost. The main purpose of variances is to
provide reasons for off-standard performance. In this way, management can improve operations, correct
errors and deploy resources more effectively to reduce costs.

Direct material standards and variance analysis


Direct material standards are derived from the amount of material required for each product or operation.
This should take into account the most suitable material for the product specification and design. It should also
include any anticipated wastage or losses in the process. Direct material standards should also consider the
standard price of the material, based on the most suitable and competitive price as required by the most
suitable quality of material. These prices should also include economic order quantity, discounts and credit
terms offered by suppliers.
The standard material used and the standard cost of the material are combined to calculate the standard
material cost. By comparing the actual material price and the actual material used with the standards
calculated, the material price and the material usage variance can be determined.
Material mix and yield variances
The direct material usage variance measures the change in total material cost caused by using a non-standard
amount of material in production. It is also possible to subdivide this variance into a direct material mix
variance and a direct material yield variance. This is mostly undertaken in process industries where a standard
input mix is the norm.
Identifiable components of input are combined during production to produce an output in which the individual
components are no longer separately identifiable.
It is sometimes necessary to vary the input mix. As a result, this may lead to an output from the process that
will differ from what was expected. The material mix variance therefore measures the change in cost caused
by an alteration to the constituents of the input mix. The material yield variance measures the change in cost
brought about by any deviation in output from the standard process output.
Direct labour standards and variance analysis
Direct labour standards are derived from the analysis of activities required for different operations. Often a
time and motion study is carried out to determine the most efficient production method, including operating
conditions, equipmentrequired and best practice.
Following this, the time is analysed to determine the standard hours required to complete an operation.
Standard wage rates are identified using rates of pay for employees required to carry out the operation, which
are normally set by the company. This standard time and standard wage rate are combined to calculate the
standard labour rate.
Overhead standards – variable overheads
Where overheads vary with activities, a standard variable overhead rate is used. However, several different
activity measures exist and it is important for the organisation to identify which measure influences overhead
cost the most. For example, volume related variable overheads could vary with direct labour, machine hours,
material quantities or number of units. In practice, the most frequently used are direct labour hours or
machine hours.
The variable overhead rate per unit is applied to the standard labour or machine usage to calculate a standard
variable cost per unit. The two variances calculated for variable overheads are:
1. The variable overhead expenditure variance, which is equal to the difference between the budgeted flexed
variable overheads for the actual direct labour or machine hours of input, and the actual variable overheads
incurred.
2. The variable overhead efficiency variance, which is the difference between the standard hours of input and
the actual hours of input for the period, multiplied by the standard variable overhead rate.
Overhead standards – fixed overheads
These overheads are largely independent of changes in activity and remain unchanged in the short term over
wide ranges of activity. The budgeted annual fixed overhead is divided by the budgeted level of activity to
determine the standard fixed overhead rate per unit of activity. Machine hours are normally used for machine-
related overheads and direct labour hours are used for more labour-related overheads. This standard rate is
applied to the standard labour or machine usage per unit to calculate the standard fixed overhead cost for a
product.

The total fixed overhead variance is the difference between the standard fixed overhead charged to
production and the actual fixed overhead incurred. An under- or over-recovery of overheads may occur
because the fixed overhead rate is calculated by dividing budgeted fixed overheads by budgeted output. If
actual output or fixed overhead expenditure differs from budget, then an under or over recovery will occur.
Therefore under- or over-recovery may be due to a fixed overhead expenditure variance arising from actual
expenditure differing from budgeted expenditure. Alternatively, a fixed overhead volume variance may arise
from actual production differing from budgeted production.
Other variances –
sales variancesSales variances can be used to analyse the performance of the sales function in a similar way to
those for manufacturing costs. Sales variances are calculated in terms of profit or contribution margin, rather
than on sales value. Other variances – planning and operational variances.
Some variances will arise due to factors that are almost or entirely within the control of management. These
are referred to as operational variances. Variances that occur from changes in factors external to the business
are referred to as planning variances. As planning variances are not under the control of operational
management, it cannot be held accountable for them.

Standard costing and variance analysis in practice


In a recent CIMA research study on Contemporary Management Accounting Practices in UK Manufacturing,
over 70% of UK manufacturing companies studied employed standard costing practices. All companies which
used standard costing set standards for material costs, while 90% set standards for labour costs and nearly
70% set standards for overheads

However, standard cost variances often do not appear as part of profit and loss information. Over half of
companies using standard costing based their reports on actual costs. Some companies added back variances,
while others updated material standards so that they approximated actual costs. Despite not appearing in the
account, most of the standard cost companies calculated some material and labour variances for control
purposes. Overhead variances were much less well used and reported, and only one company sub-divided
both variable and fixed overheads.
The conclusion from the report was that although most manufacturing
companies do use standard costing, they tend to be very selective in their use of variance analysis, especially
overhead variances. The use of fixed overheads was particularly scarce.

1.The analysis of variances facilitates action through ‘management by exception’. Here managers concentrate
on business areas that are performing below or above expectations. Managers can largely ignore those that
appear to be conforming to expectation.
2.The setting of standards and revision and monitoring encourages reappraisal of methods, materials and
techniques. This leads to cost reductions and process improvement.
3.A properly developed and understood standard costing system with full participation and involvement
creates a positive attitude towards cost control throughout the organisation.
4. Modern technology and reporting software has allowed for variance analysis to be undertaken
automatically without the need for complex manual calculations. Microsoft Excel Work Essentials is a
commonly used tool to undertake variance analysis.

Reported drawbacks
1.Standard costing principles are at odds with modern business trends such as continual improvement and
responding to individual customer needs. The ‘McDonaldisation’ of society has led to criticisms of
standardising services in order to reduce costs, but at the risk of reduced customer service and individuality.
The problem is that driving down costs is often associated with:
2. Reduced quality
3. The externalisation of costs
4. A lack of attention to the individual needs of customers

All these factors seem to contradict modern thinking about the direction in which business practice is moving
in many areas of the economy.
The two underlying principles of standard costing are that:
1. A standard set before a period is a satisfactory measure throughout the period.
2. The performance is acceptable if it meets this standard.
These principles are at odds with the spirit of JIT (Just in Time) manufacturing. JIT organisations adopt a
climate of continuous improvement and the idea of normal levels of wastage and efficiency is unacceptable
because of the drive to zerowastage and increasing efficiency. Consequently, standard costing may become
less used in modern manufacturing environments.
• Standard costing and variance reporting may be time consuming and expensive to run.
• If the standard is incorrect or outdated, any comparison with actual is also likely to be incorrect or
misleading. In modern business environments with rapidly changing conditions, standards quickly become out
of date and lose their control and motivational effects.
• Elaborate and complex variances, especially overhead variances, are often not well understood by managers
and are ineffective for control purposes.
• There are several reasons why actual results may differ from standard. The combination of the four factors
below makes standard costing and variance analysis very difficult in practice.
1. Variance may occur as a result of an error in measuring the actual outcome.
2. The standard may be out of date because of a change in operating conditions.
3. Variances might result from inefficient or efficient operations.
4. Variances can be caused by random, uncontrollable factors.

• How managers use standard costs for planning and control in the management process:
1. Planning-For budget development; product costing, pricing, and distribution –
2.Performing-For measurement of expenditures and control of costs as they occur Standard Costing
• How managers use standard costs for planning and control in the management process:
Evaluating—For variance analysis
Communicating—For variance reports
The primary difference between standard costing in a service organization and standard costing in a
manufacturing organization is that a service organization has no direct materials costs.
• In a standard costing system, costs are entered into the Materials, Work in Process, and Finished Goods
Inventory accounts and the Cost of Goods Sold account at standard cost; actual costs are recorded separately.
• The following elements are used in determining a standard cost per unit: –
- Direct materials price standard
-Direct materials quantity standard
-Direct labor rate standard
- Direct labor time standard
- Standard variable overhead rate
-Standard fixed overhead rate
• How standards are developed: – The direct materials price standard is based on a careful estimate of all
possible price increases, changes in available quantities, and new sources of supply in the next accounting
period.
The direct materials quantity standard is based on product engineering specifications, the quality of direct
materials, the age and productivity of machines, and the quality and experience of the work force. – The direct
labor rate standard is defined by labor union contracts and company personnel policies.
The direct labor time standard is based on current time and motion studies of workers and machines and
records of their past performance.
The standard variable overhead rate and standard fixed overhead rate are found by dividing total budgeted
variable and fixed overhead costs by an appropriate application base.
Standard direct materials cost is the product of the direct materials price standard and the direct materials
quantity standard.
Standard direct labor cost is the product of the direct labor rate standard and the direct labor time standard.
Standard overhead cost is the sum of the standard variable overhead rate and standard fixed overhead rate.
A product’s standard unit cost is the sum of the following: –
Standard direct materials cost
– Standard direct labor cost
– Standard overhead cost
• Variance analysis is the process of computing the differences between standard costs and actual costs and
identifying the causes of those differences.
Role of flexible budgets – A flexible budget summarizes expected costs for a range of production levels: •
Budgeted fixed and variable costs
• Budgeted variable cost per unit Variance Analysis
The flexible budget formula determines total budgeted costs for a range of levels of output.
Variance analysis has four steps:
– Compute the amount of the variance.
– Determine the cause of any significant variance.
– Identify performance measures that will track those activities, analyze the results of the tracking, and
determine what is needed to correct the problem.
– Take corrective action.
Total direct materials cost variance is the sum of the direct materials price variance and the direct materials
quantity variance.
– Direct Materials Price Variance = (Standard Price – Actual Price) × Actual Quantity
– Direct Materials Quantity Variance = Standard Price × (Standard Quantity Allowed – Actual Quantity)
Computing and Analyzing Direct Labor Variances
• Total direct labor cost variance is the sum of the direct labor rate variance and the direct labor efficiency
variance.
– Direct Labor Rate Variance = (Standard Rate – Actual Rate) × Actual Hours
Computing and Analyzing Direct Labor Variances
• Total direct labor cost variance is the sum of the direct labor rate variance and the direct labor efficiency
variance.
– Direct Labor Efficiency Variance = Standard Rate × (Standard Hours Allowed – Actual Hours)

Computing and Analyzing Overhead Variances


• The total overhead variance is divided into two parts:
– Variable overhead variances
– Fixed overhead variances
Computing and Analyzing Overhead Variances
• Using a flexible budget to analyze overhead variances
– Total Budgeted Overhead Costs = (Variable Costs per Direct Labor Hour × Number of Direct Labor Hours) +
Budgeted Fixed Overhead Costs
• Computing overhead variances – Total variable overhead cost variance is the difference between actual
variable overhead costs and the standard variable overhead costs Computing and Analyzing Overhead
Variances.The variable overhead spending variance (also called the variable overhead rate variance) is
computed by multiplying the actual hours worked by the difference between actual variable overhead costs
and the standard variable overhead rate. Computing and Analyzing Overhead Variances. The total fixed
overhead cost variance is the difference between actual fixed overhead costs and the standard fixed overhead
costs that are applied to good units produced using the standard fixed overhead rate. Computing and
Analyzing Overhead Variances.
The fixed overhead budget variance (also called the budgeted fixed overhead variance) is the difference
between budgeted and actual fixed overhead costs.
• Analyzing and correcting overhead variances Using Cost Variances to Evaluate Managers’ Performance
• To ensure that performance evaluation is effective and fair, a company’s evaluation policies should be based
on input from managers and employees and should be specific about the procedures managers are to follow.
Using Cost Variances to Evaluate Managers’ Performance
• Entering variances from standard costs into a performance report helps pinpoint areas of operating
efficiency and inefficiency. Using Cost Variances to Evaluate Managers’ Performance
• A managerial performance report based on standard costs and related variances should – Identify the
causes of each significant variance. – Identify the personnel involved. Using Cost Variances to Evaluate
Managers’ Performance
• A managerial performance report based on standard costs and related variances should (cont.) – Specify the
corrective actions taken. – Be tailored to the manager’s specific areas of responsibility.

In a standard costing system, predetermined estimates of the costs of products and services will be
established and then compared with the actual costs as they are incurred. Predetermined costs are
standard costs, which should be incurred under efficient operations (Drury, 2009). The difference
between the standard costs and the actual costs is known as a variance. Here, it is to point out that
standards costs are not the same as budgeted costs. The principal differences between them lie in their
scope. Both are concerned with laying down cost limits for controlling. However, budgeted costs impose
limits to total cost for an organisation and standard costs are attached to products and to individual
manufacturing operations (Glautier, 2011).

As indicated, standard costing systems are applied in cost centers where “the output can be measured
and the input required to produce each unit of output can be specified” (Drury, 2009, p. 277). Therefore,
standard costing is most suited to organizations such as manufacturing companies where activities
consist of a series of common or repetitive operations. It also can apply to service industries such as
transport, computing and banking (number of cheques) and to parts of the public sector (street
cleaning, refusal disposal) (Lucey, 1996). In addition, organizations that produce a wide range of
products can use a standard costing system as long as the manufacturing consists of a series of common
operations.

One of the main objectives of an organisation is to minimise the cost of production and to control the
costs as they are limited resources within a business (Gupta, 2010). Management accounting
literature provides several tools in order to achieve these objectives. In this context, the system for
collecting and reporting revenue and cost information by areas of responsibility is called responsibility
accounting (Siegel & Shim, 2006). It is based on the assumption that managers should be held
responsible for their performance. A well-designed responsibility accounting system integrates
responsibility centers within the organisation. In addition, responsibility centers are units within the
organization, which have control over costs and revenues (Siegel & Shim, 2006). There are different
types of responsibility centers such as profit centers, investment centers, revenue centers and cost
centers. In the following report, the focus is on cost centers. Here, a variance analysis based on
standard costing is a performance measure of a cost center (Siegel & Shim, 2006). In addition, a
standard costing system is a useful tool facilitating decision-making.
RESEARCH METHODOLOGY
OBJECTIVES OF STUDY
 To study the cost control by establishing standard costing and variance analysis.
 To provide formal basis for assessing performance and efficiency.
 To aasist in setting budgets.
 To study about causes of variance analysis.

SCOPE OF STUDY
Standard costing includes a advantage that it can be used for product costing,for controlling costs,and for
decision making purposes.
Standard costing are used to assign per unit costs to production to value inventory,to control overhead
spending and to measure and evaluate the use of production capacity with respect to the incurrence of fixed
overhead costs.
variance tracking is a key to project management and needs logical approach.The project managers identify
the variance thresholds and develop a plan.variance is a measurable change from a known standard or
baseline.In other words,variance is the difference between what is expected and what is actually
accomplished. variance analysis is the quantitative investigation of the difference between actual and planned
behaviour.This analysis is used to maintain control over a business.

LIMITATIONS OF STUDY
Information can be out of date or inaccurate as it is presented by using secondary data.
The data is limited only upto one company.
Administrative data,which is not originally collected for research,may not be available in the usual research
formats or may be difficult to access to.
The documents or data collected may lack authenticity.
The way things are measured may change over time,making historical comparisons difficult.

SIGNIFICANCE OF TOPIC
 Variance analysis aids efficient budgeting activity as management wishes to have lower deviations
from the planned budgets. Wanting a lower deviation usually leads managers to make detailed and
forward-looking budgetary decisions.
 Variance analysis acts as a control mechanism. Analysis of large deviation on key items helps the
company in knowing the causes and it helps management look into possible ways of how such
deviation can be avoided.
 Variance analysis facilitates assigning responsibility and engages control mechanism on departments
where it is required. For example, if labour efficiency variance is seen to be unfavourable or
procurement of raw material cost variance is unfavourable, the management can enhance control of
these departments to increase efficiency.
 Standard costing is an important subtopic of costaccounting. Standard costs are usually associated
with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead. ...
If actual costs are greater than standard costs the variance is unfavorable.
 In accounting, a standard costing system is a tool for planning budgets, managing and controlling
costs, and evaluating cost management performance. A standard costing system involves estimating
the required costs of a production process.

Standard Costing one of the advance technique of cost accounting . With this manager calculates the
standard cost and compare it with actual cost and after calculating variance , improvement is done in
area of production . So Standard costing is so important for every type of business organisation . We
can explain its importance under following points

1.Increase the efficiency

Account manager fixes the standard cost of direct material , labour and overheads and pre-
determined standard cost increases the efficiency of production , every worker produce goods
according to standard cost . After this actual cost is also compare with standard cost . With this
comparison , manager will succeed to increase the efficiency of worker for reducing cost.

2.Effective utilization of resources

Standard costing is also helpful for effective utilization of resources .

3.Use in Budgetary Control


Standard costing can also use in budgetary control . We know that budgetary control is the part of
management and in controlling , it can be used . In budgetary control , not only standard cost is
calculated but after comparing relative actions of improvement are taken . With standard costing ,
effective control of cost can be possible .

Proper decisions

Standard costing is also helpful for taking proper decisions for deciding cost. There are large number
of expenses and there are many alternatives of these expenses . When standard cost is decided at
that time , best alternative from different expenses is chosen and it will reduce extra cost burden

Standard costing can also use in budgetary control . We know that budgetary control is the part of
management and in controlling , it can be used . In budgetary control , not only standard cost is
calculated but after comparing relative actions of improvement are taken . With standard costing ,
effective control of cost can be possible.
LITERATURE REVIEW

A pragmatic approach to product costing based on standard time estimation

Jianxin Jiao, Mitchell M Tseng


International Journal of Operations & Production Management 19 (7), 738-755, 1999
Proposes a pragmatic approach to product costing. The approach involves two stages, namely the preparatory
stage and the production stage. In the preparatory stage, standard routings are first extracted from existing
products. A generic activity hierarchy is established according to the analysis of standard routings, where cost
drivers for each activity are identified and summarized by appropriate Cost-related Design Features (CDFs).
Then the Maynard Operation Sequence Technique (MOST) is employed to analyze each operation of standard
routings to determine the associated standard time. Historical cost data are analyzed to induce the relationships
between the CDFs and standard time, namely Time-Estimating Relationships (TERs). By allocating plant-wide
overhead costs to standard routings, the unit price of standard time is established to indicate Cost-Estimating
Relationships (CERs). A library of material costs is also summarized from existing products. In the production
stage, CDFs are first induced from the schematic of a new design. Then a “dummy process plan” for this design
can be inferred and used to retrieve the associated TERs to determine its time estimate. Once a standard time
has been estimated, CERs can be applied to compile the total product cost by adding the estimated material
costs. A case study conducted in an electronics enterprise is also reported.

2.Standard costing in Japanese firms: Reexamination of its significance in the new manufacturing environment

Anura De Zoysa, Siriyama Kanthi Herath


Industrial Management & Data Systems 107 (2), 271-283, 2007
Purpose-The purpose of this paper is to review literature on standard costing in Japanese manufacturing
environment. It examines the changes in the manufacturing environment in Japan that has lowered the
significance of standard costing in Japanese firms and investigates the current level of its applicability in
Japanese firms.

Design/methodology/approach-The paper systematically categorizes the relevant literature and reviews it


methodologically.

Findings-The paper finds that standard costing is still being used by a large number of firms both in developing
and developed countries. Overall, the research suggests that the importance of standard costing has not declined
to such a low level despite the technological changes. In Japan standard costing is still used for different
purposes despite its apparent weaknesses.

Research limitations/implications-This is not an empirical investigation of standard costing in Japanese


manufacturing firms.

Originality/value-The paper will be useful to researchers, cost accountants and others concerned with product
costing to understand the importance of standard costing. It is also expected that the current research will help
reveal whether or not one should continue teaching standard costing in the classroom.
3.Target costing in New Zealand manufacturing firms

Author:Caleb J. Rattray (University of Canterbury, Christchurch, New Zealand)


Acknowledgements:The authors wish to thank the participants at the 7th Conference on Manufacturing
Accounting Research, Tampere, Finland, 30 May‐1 June 2005, for their valuable feedback on this
paper. The comments from two anonymous reviewers have also improved the paper.
Purpose: As there is scant research outside Japan on the implementation of target costing, the
purpose of this research is to examine target costing practices in New Zealand.
Design/methodology/approach– A mail questionnaire survey was sent to 80 New Zealand
manufacturers, with a response rate of 31 (39 per cent).

Findings– A total of 12 of the 31 respondents use target costing. Findings on the use of target costing
that contrast with or add to prior studies include the following: target costing is being applied to
existing products; the manufacturing department is highly involved in target costing; the involvement
of suppliers in target costing is relatively low; considerable adjustments are made to the calculated
allowable costs, especially in order to assist sales of future products and to ensure the achievement
of target costs; and higher achievement of target costs is associated with higher firm performance.
The goals of target costing and the departments involved in the practice were similar to those in prior
studies.

Research limitations/implications– The sample size and minimal number of firms actually using target
costing has made it difficult to obtain statistically significant results. The survey method prevents
follow‐up questions and clarification of ambiguities. Single measures of performance and strategy
were used.

Originality/value– This survey provides academic researchers and teachers and firms implementing or
using target costing systems with a greater understanding of how target costing is being used by New
Zealand manufacturers, as well as adding to the scant research on target costing outside Japan.
Publisher:Emerald Group Publishing Limited
Citation:, Beverley R. Lord, Yvonne P. Shanahan, (2007) "Target costing in New Zealand manufacturing
firms", Pacific Accounting Review, Vol. 19 Issue: 1, pp.68-83, https://doi.org/10.1108/01140580710754656

1 Costing, funding and budgetary control in UK hospitals: A historical reflection

Author(s):
Neil Robson (Bristol Business School, University of the West of England,Bristol, UK)

Purpose– The purpose of this paper is to trace the changes in accounting practice in UK
hospitals, focussing on costing, funding and budgetary control, and to place more recent
accounting changes in their historic context.
Design/methodology/approach– The paper is largely chronological and draws from previous
research by the author and other secondary sources, both of which are supplemented by
reference to government publications, accounting practitioner journals and public records.

Findings– The paper argues that contrary to many implicit assumptions in academic accounting
studies, our accounting ancestors promoted, and sometimes used, accounting data in pursuit of
similar objectives to those advocated in the twenty‐first century. But, although cost information
“evolved”, within its historical context, the process of establishing standard costs was slow and
sometimes controversial, and the use of such information for funding hospital activity was
avoided. In addition, the history of accounting reform in UK hospitals is one littered with
disappointing results.

Originality/value– The paper provides an historical context to more recent accounting reforms in
UK hospitals and suggests that the long history of “problems” documented in the paper may
provide some cautionary counsel to contemporary accounting reformers.

4.Budgeting and standard costing practices in New Zealand and the United Kingdom
Author links open overlay panelChrisGuilding∗DawneLamminmaki∗ColinDrury†
https://doi.org/10.1016/S0020-7063(98)90013-9Get rights and content

The findings of a survey of budgeting and standard costing practices in New Zealand (NZ) and United Kingdom
(UK) manufacturers are reported. The results suggest that some commentators' predictions of a demise in
standard costing and variance analysis are overstated. It has been found that standard costing systems continue
to be popular and that the majority of accountants surveyed do not envisage abandonment of standard costing
and variance analysis in advanced manufacturing technology environments. Comparisons between budgeting
and standard costing practices used in NZ and the UK reveal a high degree of consistency. In the case of the few
differences that have been observed, it appears that there is a greater lag behind prescribed practice amongst NZ
manufacturers. The main differences noted are: a greater proportion of performance reports used in NZ budget
centers fail to distinguish between controllable and non-controllable costs; NZ manufacturers are more reliant
on historic data when setting standard costs; when distinguishing between variable and fixed costs, there is a
greater tendency in NZ to simply treat direct costs as variable and overhead costs as fixed.

5.Standard costing and budgetary control in the British iron and steel industry: A study of

accounting change.

Author:John Richard Edwards (Cardiff Business School, Cardiff, UK)


Acknowledgements:We are pleased to acknowledge the financial support for this research
provided by the Economic and Social Research Council (R000237946). We are grateful for
helpful comments from participants at the 8th World Congress of Accounting Historians, Madrid,
2000 and at research seminars, held in the same year, at the Universities of Newcastle upon
Tyne and the West of England. The paper has also benefited from the observations and
criticisms of two anonymous referees.
Abstract:The use of accounting to help apply the principles of scientific management to business
affairs is associated with the adoption of standard costing and budgetary control. This first British
industry‐based study of the implementation of these calculative techniques makes use of the
case study research tool to interrogate archival data relating to leading iron and steel companies.
We demonstrate the adoption of standard costing and budgetary control early on (during t he
inter‐war period) by a single economic unit, United Steel Companies Ltd, where innovation is
attributed to the engineering and scientific background and US experiences of key personnel.
Elsewhere, significant management accounting change occurred only with the collapse in iron
and steel corporate profitability that began to become apparent in the late 1950s. The process of
accounting change is addressed and the significance for our study of the notions of evolution and
historical discontinuity is examined. The paper is contextualised through an assessment of
initiatives from industry‐based regulatory bodies and consideration of the economic
circumstances and business conditions within which management accounting practices were the
subject of radical revision.

5.The Evolution of Standard Costing in the U.K. and U.S.: From Decision Making to
Control
Thomas N. Tyson
First published: 18 December 2002

Findings
Decision making and control are two fundamental components of industrial management that are aided by
accounting information. This article traces the evolution of standard costing in the U.K. and U.S. and describes
how it has served these two purposes over time. At the start of the industrial revolution, standard costing, in the
form of past actual costs, aided managers in make‐or‐buy, pricing, outsourcing and other routine and special
decisions. In the late nineteenth century, as the mass production of homogeneous products became more
common, predetermined, norm‐based standard costs were promoted as the means to control operations and
reduce waste. The use of predetermined costs was recommended by both academic and professional branches
well into the twentieth century. Since the mid‐1980s, norm‐based standards have come under fire for not
providing appropriate strategic signals in an era of global competition, continuous improvement and perpetual
cost reduction.
This article compares the nature of standard costing practices in the British Industrial Revolution with those that
evolved in the U.S. under scientific management. The enquiry is not limited to double‐entry systems and, like
Miller and Napier (1993), the domain is broadened to include other forms of cost‐keeping practices. We utilize
primary and secondary sources to argue that the environment and rationales for standard costs have changed
fundamentally over time. It is speculated that in the future standard costing will be used far less for individual
accountability or operational control, but will return to its decision‐making roots in the form of long‐run cost
targets that benchmark the success of continuous cost‐reduction efforts.

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