Healthcare Heat Lamps - Essay Example

?Healthcare Heat Lamps Table of Contents Table of Contents 2 Introduction 3 Standard Costing 3 The Key Assumptions Related to the Calculation of Standard Costs 5 Critical Evaluation of Standard Costing 7 Strengths and weaknesses of the Standard Costing 9 Recommendations 10 Operational Statement on Standard Costing 11 Conclusion 12 References 13 Bibliography 15 Introduction The controlling of the cost management process further can be identified as related with the proper planning, coordinating, evaluating and assessment of the financial as well as management activities (IRS, n.d.). Contextually, to achieve the desire returns through the effective controlling of finances, organisational managers require considering proper budget allocations, resource availability checks, maintaining accounting records, forecasting and continually assessing fixed and variable costs as well as operating ratios among others (Wisconsin Department of Health Services, 1994). To be noted, these processes are often followed through the implementations of standard costing methods (Berger, 2011). However, standard costing possesses both negatives and positives in offering better control to the management when applying cost management strategies. The same will be discussed in this report, taking the example of Healthcare Heat Lamps. Starting with a generalised perspective, the term, ‘standard costing’ will be defined along with the key assumptions of these mechanisms. Standard Costing The term ‘Standard’ refers to the creation of a benchmark or yardstick. Accordingly, the word ‘Standard Costing’ has been defined by the Institute of Cost and Management Accountant of London as a predetermined cost which is taken into concern when producing or performing other operations to distribute each product and/or service to the customers under normal economic conditions. The cost variables considered in standard costing procedures might be based on technological requirements for the materials, labour and overheads for the decided period of time as well as effective analysis of the working conditions (Dosen, 2013). In simple terms, standard costing can be described as the technique of designing the criteria of costs as well as revenues (Shaub, 2010). To be precise, standard costing is a traditional concept of accounting which aims at determining the standard of each elementary cost and thus, often acts as a procedure of comparing the predetermined costs with the actual costs. Technically, it is considered as quite beneficial in discovering the deviations that are financially well known as ‘variances’. ‘Variances’ can be defined as the predetermined rate that is generally implemented in the standard costing as well as budgetary control systems. It can be affirmed in this context that the analysis of variances is deemed to be essential to summarize the incidents as well as defining the process of standard costing so as to support the cost control aims of the company (Sivakumar, 2009). The method of standard costing might be based on an assortment of key factors that have been mentioned below. Determining the suitable benchmarks for each component in terms of cost variances Establishment of information regarding actual as well as standard costs that should be executed Comparing actual costs with the standard costs to determine the variances Properly analysing the variances to find out the actual cause of differences in the costs calculated Reporting the responsible authorities for developing and implementing curative measures to mitigate the differences in the costs as deciphered through the variances (Dosen, 2013) In this context, for the better understanding of the concept of standard costing, a pictorial flow chart has been illustrated below: Source: (Kingdee, n.d.) The Key Assumptions Related to the Calculation of Standard Costs The calculation of standard costing is generally conducted on the basis of certain key assumptions. These key assumptions have been listed below in a brief manner for comprehensive understanding of the same. Equipment Age The age of equipment is strongly related with the productivity of the same. It is owing to the fact that if a machine is approximately at the end of its productive life, definitely it would be incurring high maintenance costs which ultimately will give rise to the cost of production resulting in cost constraints throughout the process (Accounting Tools, 2013). Equipment Set-Up Speeds The time of setting the equipments is also assumed to be an important factor. For instance, if the duration of project setup exceeds the standard time, it would give rise to the cost variances in the production or the operational process; thereby, inhibiting the entire cost management system applied within the company (Accounting Tools, 2013). Labour Efficiency The productive capability as well as efficiency of the labour is strongly related with manufacturing costs incurred during the operational process. Besides, to compete in the market, if some modern technological equipment is implemented, the fixed costs and the costs of training along with other variable costs, also increases substantially (Accounting Tools, 2013). Labour Rate Change Raising the salary is another vital factor of creating differences between the standard cost and the actual cost of production. In often instances, it has been witnessed as a variable to incur huge cost; thus, imposing significant impact on the entire costing process (Accounting Tools, 2013). Raw Materials The rate and availability of raw materials is also assumed as a vital deliverable in the calculation of standard cost. It is in this context that the costs of raw materials tend to determine the quantity of the finished goods to be supplied to the customers with due attention towards attaining a break-even point. This variable is also assumed to impose strong influences on the quality and quantity concerns within the operational process of a company (Accounting Tools, 2013). Critical Evaluation of Standard Costing Prior to the critical evaluation of the conceptual framework of standard costing, due consideration is required to be rendered over the difference between standard cost as well as estimated cost which is also quite likely to highlight the relationship between these variables as well. Standard costing is generally based on the fundamental concept of scientific analysis. This particular mechanism has been implemented in almost every industry to set up the standard costs and measuring the required target. It is generally based on the measurement and evaluation of several factors (Evans, 2012). There have several types of standard methods that can be applied to evaluate the role of standard costs in preserving the efficiency of cost control measures applied by an organisation. Ideal Standard The notion of ideal standard refers to the most favourable condition, an organisation needs to achieve the targeted cost efficiency margin. It is generally based on high degree of efficiency assuming that no machine breakdown, no labour ideal time in the production process and no power failure will occur during the execution of the operational process (The Institute of Chartered Accounts of India, n.d.). However, from a practical understanding, such an assumption can be considered as void and superficial. This in turn limits the applicability of the standard costing results. Basic Standard The basic standard costing method is generally based on fixed parameters such as material costs, labour costs and the other expenses related with the organisational production (The Institute of Chartered Accounts of India, n.d.). This particular approach to standard costing also limits the uniformity and broadness of the entire mechanism. Current Standard Another type of approach often considered when implementing standard costing approach includes the current standard method, which is generally based on the short-run performance of the organisation, concentrating over the current conditions as well as situational requirements (The Institute of Chartered Accounts of India, n.d.). This particular approach can be criticised on the ground that in often instances, the project which is calculated as cost intensive in the short-run, prove beneficial in the long-run. Therefore, taking into account the short-run aspects only, is most likely to result in significant flaws in the decision making process of the organisation. Normal Standard This standard principally emphasises the long-run aims and performances of a trade cycle (The Institute of Chartered Accounts of India, n.d.). Such an approach further limits the applicability of standard costing mechanism under the similar grounds as in the case of current standard approach. Strengths and weaknesses of the Standard Costing Based on the above discussion, the strengths and the weaknesses of the standard costing methods are being elaborated hereunder. Strengths As standard costing techniques tend to consider the rudimental costs associated with almost variable involved in the operational process, the budget prepared on the basis of standard costing offers greater control on cost measures from a futuristic perspective The standard costing method is also regarded as highly obliging to define the actual inventory costs engaged in a particular organisation’s operational process for a particular period of time The deviation of standard cost is also found to be effective for mapping the overhead expenses at a particular period of time. From an in-depth perspective, it can be observed as highly beneficial to define the existing gap between the expected cost and actual cost variances (Accounting for Management, 2012) Weaknesses On the contrary, there are certain limitations existing as well, concerning the method of standard costing. As mentioned below, Setting the product price as per the assumptions of standard costing generally focuses on actual cost, due to which the standard cost lacks importance in the implementation of final decision making process High chances of bias or inaccurate decisions as the process focuses on one particular dimension of cost management at one point of time; for instance, the results obtained through the standard costing method may highlight that purchasing raw materials in a bulk may be helpful to reduce per unit raw material cost, but ultimately it will increase the inventory cost, which is eventually ignored in the process Small and medium sized organisations face significant challenges in implementing this method owing to their limited need to account each variable in a systematic manner, which if executed shall result in excess accounting costs This predefined method is focused on forecasting costs at a fixed ratio, which might limit the accuracy of the decisions taken when budgeting The requirement of customer is always unpredictable and thus technological changes are a common phenomenon in the organisation which although is ignored in the standard costing process Standard costing is often regarded as a lengthy, time consuming and complex process which increases the risk of out-dated results (Accounting for Management, 2012) Recommendations Based on the understanding developed from the above analyses, Health Care Heat Lamps can be recommended to implement the standard costing method by focusing on two or more approaches, blending the types in accordance with their possessed limitations and advantages. The reason is it will be very helpful for the company to make a standard budget forecast in terms of materials requirements, product costs, fixed and variable overheads and inventory costing with greater applicability. The company must also render due significance towards identifying all the variables involved in its operational process, and accounting those variables therefore to obtain adequate control on the cost measures. Operational Statement on Standard Costing Conclusion The success of any organisation relates coherently with the mechanisms through which it has managed and controlled its costs effectively and efficiently. Efficiently controlling the finances invested in the entire operational process and managing the costs of resources thereon is highly required in the organisation to achieve the desired returns on the investment. From a critical perspective, it can be stated that rather than applying a particular approach to standard costing, organisations such as Health Care Heat Lamps must focus on executing a blend of more than one approach, so as to preserve the applicability of the technique. For instance, application of both current and normal standard in the cost control measures shall result in increased efficiency to the cost control measures of Health Care Heat Lamps, assisting it to control both the short-run and long-run performances. References Accounting for Management, 2012. Advantages and Disadvantages of Standard Costing and Variance Analysis. Home. [Online] Available at: http://www.accounting4management.com/advantages_disadvantages_standard_costing.htm [Accessed July 06, 2013]. Accounting Tools, 2013. Standard Cost Creation. Standard Costing. [Online] Available at: http://www.accountingtools.com/standard-costing [Accessed July 06, 2013]. Dosen, 2013. Meaning of Standard Cost and Standard Costing. Standard Costing and Variance Analysis, pp. 597-641. Evans, M. H., 2012. Course 19: Managing Projects. Excellence in Financial Management, pp. 1-56. IRS, No Date. Financial Control. Small Businesses & Self Employed. [Online] Available at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Financial-Control [Accessed July 06, 2013]. Kingdee, No Date. Process. Standard Costing. [Online] Available at: http://www.kingdee.com/foreign_account/product/StandardCost.pdf [Accessed July 06, 2013]. Shaub, M. K., 2010. American Accounting Association. Issues in Accounting Education, Vol. 25, No. 4. pp. 789-793. Sivakumar. R., 2009. Uses of Accounting Information. Standard Costing & Variance Analysis. [Online] Available at: http://www.primeacademy.com/stdcostingppt.pdf [Accessed July 06, 2013]. The Institute of Chartered Accounts of India, No Date. Types of Standard. Standard Costing, pp. 8.1-8.53. Wisconsin Department of Health Services, 1994. Financial Reporting. Basic Elements of an Effective Financial Management System. [Online] Available at: http://www.dhs.wisconsin.gov/grants/Administration/FMM/BasicElements.pdf [Accessed July 06, 2013]. Bibliography Bamber, E. M. & Bamber, L. S., 2006. Using 10–K reports brings management accounting to life. Issues in Accounting Education, Vol. 21. pp. 267-290. Bose, D. C., 2009. Fundamentals of Financial Management. PHI Learning Pvt. Ltd. Banjerjee, B., 2005. Financial Policy and Management Accounting 7Th Ed. PHI Learning Pvt. Ltd. Berger, A., 2011. Standard Costing, Variance Analysis and Decision-Making. GRIN Verlag. Drury, C., 1998. Standard Costing. Cengage Learning. Principles of Accounting, 2012. Managerial Accounting. Chapter Seventeen: Introduction to Managerial Accounting. [Online] Available at: http://www.principlesofaccounting.com/chapter17/chapter17.html [Accessed July 06, 2013]. Rajasekaran V., 2010. Cost Accounting. Pearson Education India. The Institute of Chartered Accounts of India, 2012. Operating Costing. Cost and Management Accounting. [Online] Available at: http://www.myicwai.com/StudyMaterial/Cost_Mgmt_Ac.pdf [Accessed July 06, 2013]. Read More