Since the 1980s, standard cost systems (SCSs) were the subject of severe criticism. Most scholars believed that they were inefficient for providing information, which might interest advanced manufacturers. Nevertheless, most American firms still prefer these cost accounting tools. Regardless of critics, the primary advantage of SCS is the fact that it is the combination of control, financial, managerial, and accounting methods (C. Cheatham and L. Cheatham 23). Upgrading it might eliminate all disadvantages and benefit companies. Still, it is paramount to understand the points of criticism to improve the whole system.
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There are three primary sources of critics. First of all, it is claimed that system-related variances are obsolete. There are several types of variances, e.g. those pertaining to raw materials, i.e. inefficiency of ordering and delivering raw materials and failing to determine necessary quantities of materials. Variances related to material inventories and efficient use refer to the quantity of purchased and actually used materials, i.e. the difference between consumed materials and the set standards. The next variances are those connected to production levels and quality, i.e. divergence from scheduled production and budget or expected quality. Finally, there are variances relating to sales analysis indicating costs deriving from lost sales or customer dissatisfaction.
Another point of criticism is the fact that SCSs lack sources for continuous improvement. It means that these systems do not motivate the companies to make positive changes because designed standards are not dynamic. There are several ways to handle the challenge of not dynamic standards such as using the results of previous or base periods as standards, deploying benchmarking, i.e. investigating performance of the companies involved in the same industry, predetermining cost reductions, and using target costs. Finally, SCSs are criticized for the consequences of the variances for responsibility accounting.
This point implies that reporting systems lead to internal competition instead of promoting cooperation because departments and managers do not communicate. Instead, they seek ways to avoid responsibility. One way to solve this problem is to decentralize and grant equal responsibilities to all departments and people involved in the production and distribution process.
Another way to update SCSs is to combine them with the elements of activity-based costing systems (ABCs). For example, it might be beneficial to use SCS for controlling direct costs while ABC might be applied to indirect costs or use them within different systems of a manufacturer. In general, the combination of both systems is advantageous because it grants an opportunity to enjoy the benefits of ABC analysis and SCS control features (C. Cheatham and L. Cheatham 31).
To sum up, I want to say that even though SCSs are harshly criticized, these points of critics can be used to upgrade and benefit from them. The only challenge is to determine the gaps correctly and find the ways to fill them. To my mind, dynamic standards can be deployed for updating all aspects of activities and variances. I believe this statement is true because specific levels of production or particular quantities of used materials as well as certain levels of responsibility can be seen as standards.
Even though developing dynamic standards might be time and cost consuming, it is more beneficial than suffering losses from inefficient accounting and control tools. That said, this article is both theoretically and practically applicable. The knowledge gained from reading it can be utilized for updating SCSs and making accounting and management processes more effective and planning more accurate. The most significant accomplishment of this article is that it offers ready-to-implement decisions, which can be applied to practice right away.
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Cheatham, Carole B., and Leo B. Cheatham. “Redesigning Cost Systems: Is Standard Costing Obsolete?” Accounting Horizons 10.4 (1996): 23-31. Print.