Management Accounting Techniques In Manufacturing Firms



MANAGEMENT ACCOUNTING TECHNIQUES IN      MANUFACTURING FIRMS (A CASE STUDY OF NIGERIA BREWERIES PLC. ABA)

STANDARD COSTING TECHNIQUES

Is a control techniques that compares standard costs and standard revenues to actual costs and actual revenue in order to determine differences  that can be investigated. Standard costing uses standard of performance and of prices derived prices.

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Each unit being produced can have a standard material cost , a standard direct labour cost and a standard cost accounting is a classic case of the use roughly this means that alone , and concentrate instead on the things that are deviating from planned result. With standards require little attention. Instead management’s interest is centered on the exception’s to standards.

As with all management accounting , the benefits arising from using standard costing should exceed the cost of operating it, so that there should be advantages accruing from  having a standard costing method.

These advantages are -:

  1. Usually it is simpler and need less work than an actual cost method. This is because once the standards have been set they are adhered to , and the standard cost will remain unchanged for fairly long periods.
  2. The unit cost for each identical product will be the same.
  • A standard costing techniques provides a better means of checking on the efficiency with which production is carried on , in that the difference between the standard costs and actual costs shows the changes in efficiency.
  1. The valuation of stock is facilitated
  2. Standard cost might make faster reporting available. This is because the earlier information is required the more useful it will be.   

TYPES OF STANDARD

According to osuagwu (1998). There are mainly four types of standard:-

  1. Ideal Standard: These are set at a maxium
  2. Attainable Standard: these are based on efficient (but not perfect ) operating conditions. Allowances would be made for normal material losses, machine and tool breakdowns.

3 Basic   standard : These are long –term  standards which could remain unchanged over the year . it could serve as a base to shoe trends overtime  for such item as material prices  labour rate and could be used as a base  for setting current standard .

  • Current standard: These are standard set for use over a short period reflects current conditions.

STANDARD COST: According to batty J .[1996]

Standard cost can be defined as an estimated cost prepared in advance  of production or supply correlating a technical specification of material and labour  to the prices and ways rates estimated for a selected period of time with the  addition of an apportionment of the overhead expenses estimated for the same period within a prescribed set of working conditions.

STANDARD COST CARD

All the above standard should be recorded on a standard cost card . Each unit of product must have a standard cost card containing the established for material, labour other expense and overhead.

STANDARD AND BUDGETS     batty J [1996] standard costing is a accounting techniques which adapts the concept of budgetary control . if current standard are used ,there is no conceptual difference between amount and a standard amount . The term budgeted cost is usually applied to a total amount e.g. the budgeted cost of material is # 10,000 if # 2 of material is required for each of the 5000 unit to be produced. The term standard cost generally refers to a unit cost – material standard cost is #2 . Preliminaries in standard costing system establishment

  1. The establishment of cost centers with clearly defined areas of responsibility.
  • The classification of accounts with provision for standards and actual cost with variances.
  • The type of standard to be operated.
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Relationship between budgetary control and standard cost.

According to Ihedioha [2002:202],he stated certain basic pineapples which are  common to both – they are

  1. The establishment of a pre-determined standard of target of performance .
  2. The measurements of actual performance
  3. The comparisons of actual performance in detail and in total with the product standard.
  4. The disclosure of variances between actual and standard cost and the reasons for these variance.
  5. The suggestion of a corrective action where examination of avarices indicates that this is necessary, By common usage ,the application of these pineapples to the operation of the business as a whole or its department is termed budgetary control .where as the application of these pineapples to the detailed  production operations and production is termed standard costing , The term budgeted  cost is usually applied to a total amount  g. the budgeted cost of material is #10 ,000 if # 2 of material is required for each 500 unit to be produced .The term standard cost  generally refers to a unit cost – material standard cost is # 2 .

SETTING   STANDARDS COSTS

The first step involved in installing a standard cost for each  major components or product .  Each  unit broken down in to the various  elements of cost and standard are established as follows:

Standard cost per unit        x

Standard materials cost     x

Standard labour cost         x

Standard variable overhead  x

Standard cost                   x

Standard profit                 x

Standard    selling  prices   #x

STANDARD COSTING AND BUDGETING

Standard costing techniques is a feed  back technique for the control of cost . it can be used efficiently in association with other costing  system like job costing ,process costing and  marginal costing .

 

These are two things that is very important when we consider the standard costing techniques as a feed back.

1 . The effectiveness

  1. The efficiency

Effectiveness is the achievement of desired object Selling standard costs for element of production

The primary purpose of standard costing is to keep unit  variable costs as low as possible under the give  ctive ,while the efficiency can be defined as an optimum relationship between the input and output .

A performance of a manager can be both effective and efficient  at the same time , but either condition can occur without the other ,e.g .if a company had set a target of 200,000 unit to be  produced in a particular period ,these can be a possibility of a performance where  200,000 unit are produced but with lot of waste of material and labour .This can be considered as effective because the target is achieved but efficient is absent .On the other hand a 150,000 unit may be produced at 100% efficiency  .Here effectiveness is absent .

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Selling   standard costs for element of production

The primary purpose of standard costing is to keep unit variable costs as low as possible under the give  condition . standard  costs cannot  in themselves achieve lower product cost .The aim is achieved when the workers  in a particular organization use the specified quantity for production and also pays exactly the specified amount for its input . it is therefore necessary that special care be employed in selting standard costs . in setting standard costs ,it is necessary that the factory  be so organized  that departments are clearly defined and that line of authority are identifiable . when this is done a  detailed study of the functions necessary for the manufacture  of a  single product  would be undertaken .The organization should see that the responsibility for setting the standard is given specifically to an individual or to committed  which might include the production controller ,the costs accountant among others ,since the  success of  the system of standard costing depends on the reliability  of the standard .

 

  • VARIANCE ANALYSIS

Is a means of assessing the difference between a pre determined costs and actual cost . it can improve the operating efficiency of a business by first of all , setting the predetermined standard cost structure and then , measuing costs against them in  order to measure production efficiency  .

  1. Weld [1978:15] sees variance accounting as a techniques whereby the planned activities  of an undertaking are –expressed  in budgets ,standard  costs ,standard selling prices and profit margins ,and the differences between these and the comparable actual results are accounted for .

This techniques also make use of the principle  of management by exception .

ADVERSE AND FAVORABLE VARIANCES

The difference between standard cost and actual cost is known as variance . This is then classified into:

Adverse: Actual cost greater than standard cost

Favorable: Actual cost less then standard cost .

USES AND ANALYSIS OF VARIANCE

Variance is a deviation of actual  results from the expected or budgeted result .

Analysis of variances help to determine who is responsible  for  the differences .Additionally ,variance assist in getting  feed back processes by directing attention  to the areas most in need of investigation . consequential on this manager conduct  variance  analysis to :

  1. A) Decide on any necessary action, necessary to improve the implementation of a given decision model and
  2. B) Decide on whether to change the model itself ,or the production itself ,or to uphold existing model .

The basic of Analysis is the three element of cost ,namely : material ,labour and overhead .

The three elements are broken down into eight areas as follows .

MATERIAL  VARIANCE:

  1. A) Price variance and
  2. B) Quantity or usage variance
  1. Material price variance :- This is the differences between the standard prices and the prices paid for the actual quantity purchased –Actual prices –standard prices x  Actual quantity:-[AP-SP] X A Q
  2. Material usage variance :-The material usage variance is the difference between the standard usage and the actual usage of material for the volume of output achieved ;Actual quantity –standard quantity multiplied by standard prices  [AQ-SQ]  X SR.
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LABOUR  VARIANCES :

3.Labour  rate variances :  it is the  difference between the standard rate of pay any the rate paid for the actual hours worked .Actual Rate-standard rate multiplied by Actual hours [AR –SR ] X A+1

4 Labour efficiency  variances :-  it is the difference between the standard hours allowed and the actual hours worked for the volume  of output  achieved .Actual hours –standard hours multiplied by standard  rate [  ah –SH ] X SR

OVERHEAD VARIANCES

  • Variable overhead expenditure variance :-This is a comparison of the amount of money actually spent during the period and the number of operating hours actually worked multiplied by the standard rate recovered .Actual Rate –standard Rate multiplied by Actual quantity [AR –SR] X AH
  • Variable overhead efficiency variance :- This is a comparison of the standard hours of production achieved during the period with the actual number of operating hours worked in the period .Actual hours –standard hours X  standard rate [AH-SH] SR
  • Fixed overhead expenditure variances :- This  represents the difference between the budgeted overhead for the period and the actual overhead which was  incurred , [BO-AO]
  • Fixed overhead volume variances:- This represents the difference between the budgeted output and  the actual output multiplied by the standard recovery rate [BO-AO] X SR.
  • Efficiency  variance :-[SH-AH] X SR

 

  • ABSORPTION COSTING:

Is a costing method where all costs ,direct and indirect [overhead ] are allocated to the products manufacture .The factory indirect  expenses are see as adding to the value of work –in –profess and  thence  to finished goods stock .the production cost of any article is thus comprised of direct material ,direct labour ,any direct expenses and a share of factory indirect expenses .

After  the financial  year it is possible to look back and calculate exactly what the factory indirect  expenses were .This means that this figure is used when calculate the valuation of closing stock .For a firm ,had produced 2,000 unit of which 400 units have not been sold ,with a total production cost of #200,000 ,the closing stock valuation becomes :

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