Rayong factory of the Simple Shoes Company - Essay Example

?A Distinguish between basic, ideal and attainable standards and explain how these may be used in the Rayong factory of the Simple Shoes Company. Standard cost is the pre-determined operating cost calculated from Management’s standards of efficient operation and the relevant necessary expenditure. It is used as a basis for price fixation and cost control through variance analysis. Basically standard cost reflects; Quantities of material and labor expected to be used Prices expected to be paid for materials and labor during the coming year, and, Factory expenses applicable to production based on efficient performance and practical capacity operation of the factory Standard costs are used in the following applications: Planning & Control: Standards provide a benchmark, which serves two purposes – guiding and directing the activities of the firm (planning) and analyzing whether the actual activities are in proper direction (control). Pricing Decisions: Standard cost facilitates decisions as also in decisions involving submission of quotations, replying to tenders etc. Since cost is pre-determined based on acceptable standards efficiency, decision making process is simplified. Variance Analysis: Identification and measurement of variances from standards is possible with the use of standard costs, with a view to improve performance or to revise standards, whichever is applicable. Management by Exception: By analyzing the variances, the decision maker can focus on significant deviations from standards and take corrective actions. Managers can concentrate on critical areas of activity where variances are reported. Thus, standard costs facilitate control by exception (Accounting Tools 2008). Characteristics of basic standards (AccountingCoach 2008) Particulars Characteristics Period These standards reflect the costs that would have been incurred in a certain past period (i.e. the base period). Change These standards are used for items or costs which are likely to remain constant over a long period. Short run vs. Long run Basic standards are set on a long term basis and are seldom revised. Effect These costs relate to a base year, which is chosen for comparison purposes, like price indices etc. Basic standards do not represent what should be attained in the present period. Suitability Suited only to businesses having a small range of products and long production runs. Comparison of ideal standards and attainable standards (Accountingformanagemt.com 2009) Particulars Ideal Standards Attainable Standards Conditions These represent the level of performance attainable with the ‘best’ or ‘ideal set-up’, i.e. best quality materials at favorable prices, highly skilled labor, best equipments and layout. These represent the level of performance attainable under normal operating conditions, i.e. normal efficiency, normal sales/production volume etc. Efficiency These standards focus on maximum efficiency in utilization of resources, i.e. maximum output with minimum cost These standards focus on the practical attainable efficiency, after considering normal imperfections, i.e. optimization (not minimization) of cost per unit. Attainment These are generally not attainable; hence such standards may not be taken seriously. These are attainable with reasonable effort and hence constitute a good benchmark for control. Disposition of variances Variances from the ideals would not indicate the extent to which they could have been reasonably and practically avoided. There is no logical method of disposing these variances. Here, variances are deviations from normal expectations. Hence they are disposed on the basis of the policy of the company in this regard. How these may be used in the Rayong factory of the Simple Shoes Company As is obvious from what has been discussed above a basic standard is more of a historical piece of information without much practical relevance for a new set up. Thus, it is advisable that no effort should be spent on setting up basic standards. Instead it would be much more effective if the management spends adequate time and effort to set up attainable standards with the help of detailed time study and motion study for each and every process and also set up attainable standards of material consumption and wastage under practical conditions. There would, quite obviously, be lots of discussions and confrontations while these standards would be finalized as the production department would want maximum leeway in setting those standards as it would help them to be less vigilant about wastages and spoilages if standards are lenient. However, management must also put in place ideal standards as that would serve as the ultimate goal of the company. But due care must be taken that fixing such lofty standards do not de-motivate the employees. This can be assured by fixing all production related bonuses with respect to attainable standards and not ideal standards. B Describe the procedure to be followed by Sama Samara in formulating the budget for the Rayong Factory of the Simple Shoes Company for the financial period, and discuss whether he should revise the budgets which have been already established, as suggested by Rand Warjh. The first impression one gets about the management group in Rayong Factory is that there is no cohesion among the individual members of the team and each person is busy projecting themselves in as favorable light as possible. While Samara has spent a lot of energy in devising ways to reduce costs, he has overlooked certain other vital issues that seem to threaten the very existence of the company. The potentially explosive issues of usage of child labor and exploitation of female laborers have been ignored by Samara. This reflects a lack of proper perspective on the part of Samara as a management accountant. Moreover, the rather legitimate demand of the workers for an increase in wages must be addressed immediately as it may snowball into a serious controversy that might invite government action that could put the future of the company in great jeopardy. Warjh quite rightly suggests a change in standard costs to reflect the increase in cost of labor that would result in the inevitable increase in basic wages of workers and in finding replacement workers for the alleged child laborers that critics claim work in Rayong Factory. Also the company would incur additional costs in providing safety gears to workers for safe handling of waterproof chemicals. All these increases need to be factored in the modified standard costs else it would never reflect the attainable levels by the factory. If Samara refuses to alter the standards, it would finally lead to further demoralization of the workers. References Accounting Tools. "Standard Costing." Accounting Tools. 2008. http://www.accountingtools.com/article-costing-standard (accessed January 27, 2011). AccountingCoach. "Standard Costing." AccountingCoach. 2008. http://www.accountingcoach.com/online-accounting-course/30Xpg01.html (accessed January 27, 2011). Accountingformanagemt.com. "Standard Costing and Variance Analysis." Accountingformanagemt.com. 2009. http://www.accountingformanagement.com/standard_costing_variance_analysis.htm (accessed January 27, 2011). Read More