Issues In Standard Costs And Budgeting – Chapter Seven

Issues in Standard Costs and Budgeting READ – Chapter Seven - Standard costs

Review the "Standard costs: Wake up and smell the coffee" article. When evaluating performance, many organizations compare current results with the actual results of previous accounting periods. Is an organization that follows this approach likely to encounter any problems? Explain. RESPOND – a minimum of 100 words each to two other postings.

Paper For Above instruction

Standard costing is a widely used management tool that involves comparing actual costs to pre-established standards to evaluate performance and control costs. As described in the article "Standard costs: Wake up and smell the coffee," this approach simplifies performance evaluation by providing benchmark costs for various operations and processes. However, relying solely on historical comparisons can pose several challenges for organizations, potentially impairing accurate performance assessment and strategic decision-making.

One significant issue is that past performance may not always be a reliable predictor of future performance. Market conditions, technological advancements, and operational efficiencies evolve over time, making historical costs potentially outdated. For example, if inflation has increased costs or supply chain disruptions have occurred since the last period, comparing current results solely against past actuals can lead to misleading conclusions. An organization might unfairly identify performance as poor or outstanding based on outdated benchmarks, leading to inappropriate corrective actions or complacency.

Furthermore, excessive reliance on historical actual results can hinder innovation and continuous improvement. Managers might focus on maintaining historical standards rather than striving for more efficient or innovative processes. This can inadvertently promote a culture of complacency, where employees or managers are discouraged from seeking better methods that could significantly reduce costs or improve quality.

Standard costs, while useful, should be complemented with forward-looking metrics and market trend analyses. Incorporating variance analysis that considers factors like changes in input prices or demand fluctuations can provide a more comprehensive view of organizational performance. Organizations should also update their standards regularly to reflect current market realities. Failure to do so can result in outdated benchmarks that misrepresent true performance and hinder strategic planning.

In addition, comparing current results exclusively with prior actual results may obscure underlying systemic issues. For instance, if operational inefficiencies are persistent, past actual costs may have embedded these inefficiencies, and using them as benchmarks might mask ongoing problems. Organizations should, therefore, conduct root cause analyses and integrate multiple performance indicators to get a balanced view.

In conclusion, while comparing current results to past actual results is a common practice in standard costing, this approach can lead to problems such as outdated benchmarks, lack of motivation for improvement, and a failure to account for external changes. To mitigate these issues, organizations should regularly update their standards, incorporate market and industry trends, and adopt a more holistic approach to performance evaluation that combines historical data with forward-looking insights.

References

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