The Problems in the Practice of Standard Costing and Budgetary Control System in the Manufacturing Firm

The Problems in the Practice of Standard Costing and Budgetary Control System in the Manufacturing Firm

This chapter will principally try to attempt to locate this study within the mainstream of previous related studies since piece of research includes a review of relevant literature.

Bridal (1990:32) opined that the review of the literature can serve several important purposes. Firstly it can reveal what has been previously done in the problem areas thus reviewing the researcher of the possibility of unintentional replication of previous studies secondly it can reveal or indicate whether it is feasible to do the planned research by revealing difficulties encountered by previous researchers, thirdly a through research through related literature can serve as the connecting like between the findings of previous research that has been done in the problem and the result of the proposed study.

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This study focuses on the practice of standard costing and budgetary controls system in manufacturing firms with flour Nig Plc as a case study therefore what will account for our literature review will be journals and publications on the subjects standard costing and budgetary controls and accounting texts and articles.

Based on this the area of necessary literature review will come under the following readings,

  1. Origin of standard costing
  2. the meaning of standard costing
  3. types of standard costing
  4. standard costing in planning and controlling operation
  5. budgetary controls
  6. nature and objectives of budgetary controls
  7. computerized budgetary controls system
  8. human behavioral aspects of budgetary control


Standard costing can be traced to engines and efficiency experts Solomon’s (1968:36) tracing the origin said the possibility of setting up rooms of cost with actual product and costs might be compared is implied by one or two or the early writers on costing.

For instance he said Grace and fells suggest that before any order to manufacture is given it is advisable as tending to produce greater economy in cost of production that the person best accounted with processes and details should estimate the probable cost to be measured in ways and materials in the production of articles in question. This estimate should be a minimum rather than a maximum one, and the storekeeper hawing been furnished with the particular of it should not issue more material for the order than is estimated without special authority what Grackle fells were saying here as we know.

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Solomon (1968:426) said several men before chapter had seen the potentialities of the use of standards as an aid to management but their use of then was partial and fragmenting where as chapter was rounded and complete.

According to this system has developed into an extra-ordinary too for it is perhaps the most impressive achievement of standard costing that it has gone such a long way towards providing by means of a single integrated system so many different kinds of cost data for so many different purposes.

Finally it can be seen that serious thought on standard costing started long ago and supervising engineers and efficiencing experts played active part.


Standard costing technique is used in order to improve efficiency. It is financially oriented since it involves costs used in carrying out the manufacture and sale of goods or services.

Hanson, Hammer and walqenbach (1993:1030) defined standard costing as those costs that should be incurred under normal conditions to produce specific products or to perform specific this system is important because of the measurement and attainment of a high level of efficiency. Batty (1975:9) defined standard costing as a system of accounting which is designed to show in detail how much each product should cost to produce and sell when a business is operating at a stall level of efficiency and for a given volume of output. Batty advised that the system should be revisal at intervals to reflect current realistic condition and practices.

According to him the system would also be favored looking and must be part of a fully co-ordinate management accounting system. Standard is said to be a target, which shows that is, planned or expected. It influenced by the type of management the corporate philosophy, the organization and state of efficiency (1975:9)

Batty went further to say that there is lack of understanding of what ideally should be the meaning attached to standard costing. He agrees that a pro-determined cost describes a standard cost but agreed that is also describes an estimated cost and the many variation between the two extremes. He gave the condition that make for a true standard, which should be, understands as efficiency and achievement of the objective. Attention should be given to all the factors, which affect efficiency, and these factors the assessment of which a pre-requisite to the establishment of a standard costing include.

  1. standardization of methods and procedures
  2. selection of types of standards costs
  3. Definition of capacity and an understanding of the term in the snootiest of planning and control.
  4. Establishing criteria for measuring efficiency.
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For the objectives to be achieved technical and economic factors, which affect the achievement of the objectives, should be considered.

Budenberg (1977:39) saw standard costing as the preparation of standard costs and their uses to clarify the financial results of a business particularly by the measurement of variations of actual costs from standard cost the analysis of the souses of the variances for the purpose of maintains maximum efficiency by executive action. The further emphasized that standard cost has been defined as an estimated cost prepared in advance correlating a technical specification of materials and labor to the prices and ways rate estimated for a selected period of time with the addition of an apportionment of the overhead expense estimated for the same period, within a prescribed set of working conditions. Batty  conduced that a standard cost is a pre-determined measure relation to material labor or overhead, it is a reflection of what understated condition are expected pf plant and personal. A standard is primarily an expression. Quantity x price. Therefore, a standard cost must be regarded as the true or real standard of the product concerned (1974:44).


Different names have been given to the various types of standard costing. These names include ideal standards perfection, maximum efficiency or theoretical standards. Perfection standard costs are the absolutes minimum costs that are possible under the best conceveivable operating conditions, using existing specifications and equipment of the conglomerate of names there are four types of standards. T. Lucy 2000:419 identifies then as basic standards ideal standards, attainable standards and current standards.


Lucy’s. (2000:419) Saw it as long term standards which would remain unchanged over the years. Their side use is to show trends over time for such items as material prices labor rates   and efficiency and the effect of changing methods they cannot be used to highlight current efficiency or inefficiency and would not normally form part of the reporting system except as a background, statistical exercise. He went to define. Basic standards as standards established for use over a long period from which a current standard can be developed.


Chartered institute of management accountants (CIMA) DEFINES it as a standard, which can be attained under the most favorable conditions. In some cases standards are established with a very high level of efficiency in mind. It is assumed that machines and employees will work at a very high level of efficiency, there will be no stoppage or any loses of materials or services.

According to T.Lucy (2000: 419), these are based on the best possible operating condition that is or breakdowns, no material wastage no stoppages or idle time, in short perfect efficiency. He went further to say that ideal standards if used would be revisal periodically to reflect improvements in methods material and technology clearly ideal standards would be unattainable in practice and according are really used.

However he went to define ideal standards as a standard which can be attained under the most favorable condition with no allowance for normal losses, waster and machine breakdown. Also known as a potential standard.

The use of idea standard could be considered worthwhile for investigative and development purposes but not for normal day to day control activities. In other words only absolutely necessary costs will be incurred to make the product in question such standards would represent an ideal state of affairs and there is usually great difficulty in operating ideal standard cost for the simple reason that the objectives they represent are never achieved. Manages and supervisors who are responsible for the costs can hardly approve of targets which they can never reach and which therefore result in extremely large variances.


It is a standard, which can be attained if a standard unity work is carried out efficiently. A machine properly operated or material properly used. (CIMA). in  other cases, the standards set will be those which are reasonably attainable consideration being given to the state of efficiency which can be achieved from the existing faculties.

As T. Lucy (2000:419) puts it this is by far the most frequently encountered standard. It is because it is based on efficiency but not perfect operating condition. He further said that the standard would include allowances for normal material losses realistic allowances for fatique machine breakdown. Etc

Hongren (1990:196) agrees to the above saying that attainable standards are lesser than perfection standards because of allowance for normal spoilage ordinary machine breakdown and lost time. However, enough as that the operating people will consider the achievement of standard performance to be a satisfying accomplishment.


These standards set up for over limited period to reflect current conditions, were stable condition and prices exist then a current standard is equivalent to an attainable standard but when a temporary problem exists with material quality or there is an unexpected price rose than a current standards could be sset for a limited period to deal with the temporary problem.


The world over everybody plans, government plans their activities and so do organizations be it manufacturing construction service organization, merchandising firms and not for profit making entities in essences, planning is concerned with the future and reties upon information from much sourness especially from accounting for it to succeed dike 1991: 20. The use of standard costing is the determination of the unit of product manufacture. The aim of both planning and controlling is to provide management with timely data on actual manufacturing costs and to aid in cost control and profit maximization.

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Cost systems using detailed estimates of each elements of manufacturing cost entering into the finished products are such system enable management to determine how much a product should cost standard how much it does cost actually, causes of any differences between two standard costs thus serve as a measuring device for determination of efficiency.


One of the primary purposes of a standard cost system is to control over cost by comparing actual costs with standard costs. Control is achieved by the action of management in investigation significant deviations of performance from standards and taking corrective action. Difference between the standard cost and the actual cost incurred are variances.

According to heritor and metallic 1980: 296, variance analysis is systematic process of identifying variances and definition Welsh 1986: 54 defines it as a mathematical manipulations of two sets of data in order to down some insights into the underling causes of a variation. It was also indicated that a variation if signicants, should lead to careful management investigation to determine the underling causes.


Management has a basic resistibility to plan, control and measure performance and to make division. To carry out these responsibilities, management must develop plans and budgets determine actual operating results compare actual results to planned results, evaluate differences and take corrective action to improve operatation. Budgetary controls focuses on managerial planning and budgeting. Before moving forward on budgetary control there are various definitions abound in accounting literature but all allude, to the same obvious fact.

Hanson, Hanre and walgenbach (1993:1028) see budgetary control as the steps taken by management to ensure that the goals and objectives established during the planning stage are attained and to ensure that all segments of the firm operate in a manner consistent with organizational policies.

Equally, Brown and Howard (1982:251) defined budgetary control as a system of controlling costs which includes the preparation of budgets co-ordination the departments and establishing responsibilities comparing actual performance with that budgeted and acting upon results to active maximum profitability.

A formal definition of budgetary control is that given by the chartered institute of management accountants (cima). IT states that budgetary control is the establishment of budgets, relating the responsibilities of executive to the requirement of a policy and the continuous comparison of actual with budgets results either to secure by individual action the objective of that policy or to provide a basis for its revision.

From the definition, it is clear that the budgeting is the process of developing a formal, written planned actions in financial terms.

All types of entities can derive benefits from the budgetary controls system. Although the basic concepts of budgetary control apply to types of entities the praised budgetary contrl form will very among various entities.

The budgetary control process as hand (986: 34) identified is the three basic stages.

  1. setting of pre-determined standards
  2. Measurement of actual performance against the pre-determined standards.
  3. Corrective action necessary to bring the actual performance in line with the per-determined standards.

For budgetary to form an effective control in to hands of the management the different per-determined standards should as far as possible be forecasted by the persons responsible for their achievement.

All executives should have planned conditions to aim at and improve upon and the degree to which this is being attained should be regularly brought to their notes.


Developing and using budgetary are importance parts of the management processes of any entry. Budgetary controls involves the steps taken by management during to ensure that the goal and objectives established during the planning stage are attained and ensure that the all sequent of the firm operates in a manner consistent with organizational policies managers when they make decisions since the budgets is usually the basics for performance evaluation

In budgetary control performance measures are a central component of a management control system. According to Horngren 1990: 426, a management control system is a means of gathering data to aid and co-ordinate the process of planning and control decisions throughout the organization the system improves the corrective decisions within an organization.

In other words, budgetary control ensures that actual results are positively in accordance with the overall financial and policy objectives of an establishment .

  1. to assist directors or managers to plan the future
  2. To provide clearly defined targets of output income and expenditure for each section or function of the organization.
  3. To promote co-operation and co-ordination among directors or managers in the attainment of pre-determined target.
  4. To implicated the financial requirements, normally month by month, and the sources from which the required finances are to be attained.


The major advantages of budgeting are

  1. Budgeting by formalizing the managers responsibilities for planning compels them to think ahead.
  2. Budgeting provides definite expectations that are the best framework for judging subsequent performance.
  3. Budgeting aids managers in planning the efforts. So that the objectives of the organization as a whole harmonize with the objectives of its parts.
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Many firms use computers in the budgeting process computers cannot only speed up the budgeting process but they also reduce cost of budget preparation when large quantities of data need to be processed. Computers are useful in preparing flexible budgets and in continuous budgeting. Budget performance reports can also be prepared on a timely basis by the use. Of the computer.

By using the computerized simulation models, which are mathematical statements of relationship among various operating action ties management can determine the master of budget. For example if management wishes to evaluate the impact of a proposed change in direct labor wage rates, the computer can quickly provide a revised master to reflects the new rates if management wishes to evaluate a proposal to add a new product line, the computer can quickly up date current budgeted data and indicate the effect of the proposal on the master budget.

The computer has made if possible to rearrange costs and other data in many different ways with relatively effort. If basic on formation is entered on a purchased card, magnetic tape or other input media, it can be processed to serve different purposes. For example actual and budgeted cost can be classified by product line by territory or by any other relevant basic and can brought forgather in total budget report for the firm. The realignment of costs for different cost reports would be a formidable task if it were carried out mutually, but the task is relatively easy for computer. More the costs can be recorded with little rook of error.


In the budgeting process overall goal of the business as well as specific goals for individual unit within the business are established. Significant human behavior problems can develop if managers view these goals as unrealistic or unachievable. In such a case managers consider attainable are likely to inspire managers to achieve the goals. Therefore, it is important that all levels of management be involved in establishing the budget is a planning tool that will affect human behavior and increase

The possibility of achieving the goals.

Human behavior problem can also arise when the budgeted and actual results are compared in budget performance reports these problems can be minimized if budgets are revised when substantrtial changes in expectations occur during a budget period otherwise, the budgets will be of questionable valve as incentives and instruments for controlling costs and expenses.

In the final analysis budgetary control is can been seen as modifying behaviors that, is monotint people and evaluating of their can be used to modify behaviors performance. The way budgets are arrived at can is used to modify behavior. The modification is done in that if they budgets are high or  they call for changes.

In conclusion we can say that it is not only budgeting control that modifying behavior but also variance analysis and standard costing changes people behavior and no little work in the organization.


in this chapter we traced the origin of standard costing with a view to making dearer the a means of communicating results was also discussed it will be noted that manager use variance reports to help them understand operation and deceived which areas warrant investigation.

The chapter equally looked at the essentials if budgetary control how if help in the establishment of specific goals for future operations and the period compare of actual results with these goals the establishment of specific encompasses the planning function and while the periodic compares of actual results impasses the control function of management.

The last two sub-sections of this chapter tried to look of the computerized budgeting system and human behavior

Aspect of budgeting computers are useful in speeding up  the budgetary process and in preparing timely budget formance reports while the human behavior aspect explained how behavior how can modotied.

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