Budgeting and standard costing

Standard cost;	a standard cost an estimate unit cost.
	
Standard cost is used
		-To value inventories and production cost
		-To act as a control devices
Standard cost can be used in the following circumstances;
		1. Setting budgeting and evaluate managerial performance
		2. Management by exception
		3. for decision making
		4. For Motivation devices
Standard costing is most suited to mass production and repetitive work.
For mass service industrial standard can also be used, for example Hotel, Restaurant, Banking etc....

Standard costing for material (estimate by purchase department)
	Base on- purchase contracts already agreed
		- Pricing discussed with regular suppliers
		- Forecast movement in price
		- Bulk discount
		- Quality requirement

For labour cost; Reference to payroll and agreement between trade union, base on labour grade.

Standard cost for overhead cost; STD cost can be used in marginal or absorption costing.

Standard selling price and Margin; Set standard base on anticipated market demand. or
	Cost plus pricing.
Type of standard
	1. Ideal 
	2. Attainable
	3. Current Standard
	4. Basic
	Budgeting V Standard costing 
Similarity
	1. Both involve looking	to the future or forecasting and 
	2. 				To control purpose.
	3. Budget and standard are interrelated, for example overhead absorption rate
Differences    
Budgeting 	Standard costing	
•	Total cost
•	For all functions	
•	Express in money terms

	•	unit cost 
•	For repetitive action
•	Sometime may be non monetary terms	
			
Idle time; idle time can be caused by machine breakdowns or not having enough work to give to employees because of bottleneck.

Flexible budgets; 
	1. Distinguished fixed and variable cost.
	2. Distinguished Fixed cost remains the same regardless of output variation.
	3. Variable cost may change base on output differences.
Limitation;
1.	Mixed cost cannot be cleared cut.
2.	Fixed cost may be step line function.
3.	The rate of inflation, uncertainty, demand may not be predictive.

Controllability and responsibility
Some cost might be the responsibility of two or more manager. E.g. material price and usage variance.
Reporting system must allocate responsibility appropriately.
Planning and operational variances
A planning variance (or revise variance) compares an original standard with a revised standard that should have been used if planners had known in advance what was going to happen.

An operational variance compares an actual result with the revised standard.

Implication of planning and operational variances 
•	Controllable and non controllable variances can be highlighted.
•	Used as acceptable performance measurement can motivate manager and employee, e.g. plan error or operation error.
•	Planning and standard setting would relevant and accurate.
•	Operational variance will provide fairer reflections of actual performance.
Limitation
•	Too easy to justify all the variance as being due to bad planning.
•	 Classification between plan and operation is time consuming task.
•	It is a new idea and manager would resistant to adopt.

Behavioral aspect of standard costing
With computer aided design/computer aided manufacture (CAD/CAM) system, the planning of manufacturing requirements can be computerized, so that standard can be constructed by computer, saving administrative time and expenses while providing for more accurate standards.

Total quality Management (TQM) 
	Quality means getting it right first time and improving continuously.
TQM is the process of applying a zero defects philosophy to the management of all resources and relationships within an organization as a mean of developing and sustaining a culture of continuous improvement which on meeting customer expectations.

EIGHT (8) characteristics of total quality management.
1.	Customer is King
2.	Recognised internal customer
3.	Control defect from start.
4.	All level of staff are responsible for quality
5.	Any defect should not be accepted.
6.	To get thing first right time.
7.	Quality certification programmes should be introduced.
8.	Quality provide cost saving.

Standard costing and TQM 
	Standard costing emphasis on quantities factors and ignores quality. Standard costing measure labour efficiency in term of output.
TQM focus on quality and effectiveness in terms of re-working requirement, returns from customers and defects identified in subsequent stages of production and so on.

STD costing and TQM can rarely co exist.
1.	Predetermined standards are at odds with the philosophy of continuous improvement.
2.	Standard costing is most appropriate in stable, standardized and repetitive environment.
TQM required continuous improvement; changes to improve production process, technique and product etc…
3.	Standard costing allow some wastage and defects.
However TQM aim of zero defects and get it right first time.
4.	Standard costing control system makes individual managers responsible for the variances relating 	to their part of the organizations activities.
       TQM programme aim to make all personnel responsible for the importance of quality product.

Standard Costing and New Philosophy
STD costing system create over production and stockpiling finished goods, because the higher the production volume the lower the overhead costs are spread over more units. 
	In STD costing system, adverse efficiency variance (e.g. idle time) should be avoid. So result in over building in stock level.
	Storage cost, wastage, out of date and even damage working capital (operation).
	In JIT environment, materials are purchased, production are run when it needed. So reduce unnecessary stock holding and can focus on product quality and on time delivery.
	JIT system depends on long term contractual links with suppliers, which mean that material price variances are not relevant for control purpose.
STD costing and Modern Business (Puxty and Lyall 1989)
	Planning; Budgets will still need in TQM environment.e.g.STD such as returns of particular product should not exceed 1% of deliveries during a budget period can be set.
	Decision making; Existing Standard can be used as the starting point in the construction of a cost for a new product.
	Performance measure in Mix of product profitability.
	Product Pricing
	Valuation of stock especially, closing inventory.

Variance as motivational indicators
Labour efficiency variance may indicate staff motivation at work. e.g. whether they work harder or not.
Lower motivation could lead to adverse efficiency variance. Accidents at work and non-productive hour may cause idle time variance.
	According to motivation theory (Maslow hierarchy of needs) the needs at lower level can be fulfil by monetary rewards. Example, for food, for live, for security at work etc…
	Good pay to employee would become work header and so increase productivity and efficiency.
	Management by Exception principal required manager to focus and control on variances which are outside the range of acceptable level.
	Within those levels, employees need not require to report to their manager and they know what is acceptable or not. And then become freedom at their work and reduce the need for close supervision.
Staffs take more responsible for their work and improve motivation.