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Transcript of standard costing
22 Faizullah khan Roll # A-522997
ASSIGNMENT NO.2
Cost Accounting
Application of standard costing in a manufacturing concern keeping in a view the various variance
Submitted To: Sir Waqar Akbar Allama Iqbal Open University
Submitted By: Faiz-ullah Khan Roll no , Ah-522997
April 9, 2011
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In the name of Allah, the most beneficent and the most merciful.
Faizullah khan Roll # A-522997
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Acknowledgements:
All words of praise and gratitude to the sole Lord of universe, almighty Allah. I am thank, first and foremost, Allah for having enable me to complete my effort of writing such an assignment that would not have been possible for me to complete without his help in all stages of its preparation.
I revoke peace for Hazrat Muhammad (S.A.W) for whom the earth and heaven is created.
I am thankful for my parents, teachers, friends and class fellows for having great courage and help during the report
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Dedication:
Dedicate to my Parents. I would like to admit that I owe all my achievements to the most sincere and most loving relation of this world, whose prayers are a source of determination for me.
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Abstract:
Standard costs are aid in the planning, operations and gaining insights in to the probable impact of managerial decision on cost levels and profit. Standard cost is used for Establishing Budgets, Controlling cost and motivating and measuring efficiencies.
Standard cost are also used for promoting possible cost reduction and assigning cost to material, work in process and finished goods inventories.
Levi’s Straus signature has small wholesale business that supplied miners and workers with work clothes that were strong and did not tear easily, the company is adopting the standard cost for their planning and budgeting.
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Table of Contents:
Faizullah khan Roll # A-522997
ContentsPage No
Title page 01
Acknowledgement 03
Abstracts 05
Table of contents 06
Introduction to the issue 07
Practical study of organization 13
Data collection methods 18
SWOT analysis 19
Conclusion 21
Recommendations 22
23
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Topic: - Application of standard costing in a manufacturing concern keeping in a view the various variance
Introduction to issueStandard Costing:
Standard costs are usually associated with a manufacturing company's costs
of direct material, direct labor, and manufacturing overhead.
Rather than assigning the actual costs of direct material, direct labor, and
manufacturing overhead to a product, many manufacturers assign the
expected or standard cost. This means that a manufacturer's inventories and
cost of goods sold will begin with amounts reflecting the standard costs, not
the actual costs, of a product.
Manufacturers, of course, still have to pay the actual costs. As a result there
are almost always differences between the actual costs and the standard
costs, and those differences are known as variance. Standard costing and the
related variances is a valuable management tool.
If a variance arises, management becomes aware that manufacturing costs
have differed from the standard (planned, expected) costs.
Situations in Standard Cost:
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The following situations can be accruing during standard costing:
1. If actual costs are greater than standard costs: the variance is
unfavorable. An unfavorable variance tells management that if
everything else stays constant the company's actual profit will be less
than planned.
2. If actual costs are less than standard costs: the variance is favorable. A
favorable variance tells management that if everything else stays
constant the actual profit will likely exceed the planned profit.
Process of Standard Costing:
Distinguish between a standard and a budget.
Identify the advantages of standard costs.
Describe how standards are set.
Discuss the reporting of variances.
The Need for Standards:
Standards
• Are common in business
• Are often imposed by government agencies (and called regulations)
Standard costs
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• Are predetermined unit costs
• Used as measures of performance
Distinguishing Between Standards and Budgets
Standards and budgets are both • Pre-determined costs
• Part of management planning and control
A standard is a unit amount whereas a budget is a total amount
• Standard costs may be incorporated into a cost accounting system
Advantages of Standard Costs
Facilitate management planning Promote greater economy by making employees more “ cost-
conscious” Useful in setting selling prices
Contribute to management control by providing basis for evaluation of cost control
Useful in highlighting variances in management by exceptions Simply costing of inventories and reduce costs `
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Standard Cost per Unit
• Sum of the standard costs for direct materials, direct labor, and
Manufacturing over head
• Is determined for each product and often recorded on a standard cost
Card which provides the basis for determining variances from standards.
Variances from standards
• Differences between total actual costs and total
standard costs
• Unfavorable variances occur when too much is paid
for materials and labor or when there are inefficiencies
in using materials and labor
• Favorable variances occur when there are efficiencies
in incurring costs and in using materials and labor
– A variance is not favorable if uality control standards are
sacrificed
Analyzing variances
•Variances must be analyzed to determine their significance
• First, determine the cost elements that comprise the Variance
• For each manufacturing cost element, a total dollar Variance is computed.
Then this variance is analyzed into a price variance and a quantity variance.
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The setting of standards is:
a. A managerial accounting decision.
b. A management decision
c. A worker decision.
d. Preferably set at the ideal level of performance
Practical study of the organization
levi,s denim
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In 1853, Leob Strauss, who later changed his name to Levi, moved to San
Francisco and opened a small wholesale business that supplied miners and
workers with work clothes that were strong and did not tear easily. Later in
1872, as the clothing became popular, Levi Strauss partnered with an
inventor named Jacob Davis. Davis had the interesting idea of adding copper
rivets to the corners of the pockets to the waist overalls Levi Strauss had
produced.
Quality of Levi’s Products:
100-year-old pair of Levi Strauss & Co. jeans recently purchased by the
company for $25,000. The jeans, found last November in an abandoned
mine, are one of the two oldest-known pairs of Levi's in existence.
Research & Development
Company places great emphasis on Research and Development. For this
purpose it has well equipped and modern factory run by qualified staff,
which is responsible for the development of new products and it carries
extensive research to improve the quality of the product.
It is also entrusted with the jobs of testing the raw material to enforce the
compliance to standard specifications.
Quality Control:
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Company vigorously pursues the quality in all processes starting from
procurement of the raw material to shipment of finished products to
customers.
Basic Products:
Jeans, Shirts, Shorts, coats
Variety for ladies, gents and children
Fashionable & latest designing wear
Workers suiting and many more
During my study I found that Levi’s Denim is working under powerful
manufacturing and marketing strategy. The management also employs
financial analysis for the purpose of internal control and to better provide
what capital suppliers seek in the financial condition and performance form
the firm. From internal control standpoint, management needs to undertake
financial analysis in order to plan and control effectively. To plan for future,
the financial manager assesses the firm’s present financial position and
evaluates opportunities in relation to this current position. One of the main
reasons of their success is proper investment and financing decision at the
right time.
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Examples of Standard Cost of Materials and Price Variance
Let's assume that on January 2, 2010 Denim Works ordered 1,000 yards of
denim at $2.90 per yard. On January 8, 2010 Denim Works receives 1,000 yards
of denim and an invoice for the actual cost of $2,900. On January 8, 2010 Denim
Works becomes the owner of the material and has a liability to its supplier. On
January 8 Denim Works' Direct Materials Inventory is increased by the standard
cost of $3,000 (1,000 yards of denim at the standard cost of $3 per yard),
Accounts Payable is credited for $2,900 (the actual amount owed to the
supplier), and the difference of $100 is credited to Direct Materials Price
Variance. In general journal format the entry looks like this:
Date Account Name Debit Credit
Jan. 8, 2010 Direct Materials Inventory 3,000
Accounts Payable 2,900
Direct Materials Price Variance
100
The $100 credit to the price variance account communicates immediately (when
the denim arrives) that the company is experiencing actual costs that are more
favorable than the planned, standard cost.
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In February, Denim Works orders 3,000 yards of denim at $3.05 per yard. On
March 1, 2010 Denim Works receives the 3,000 yards of denim and an invoice
for $9,150 due in 30 days. On March 1, the Direct Materials Inventory account is
increased by the standard cost of $9,000 (3,000 yards at the standard cost of $3
per yard), Accounts Payable is credited for $9,150 (the actual cost of the denim),
and the difference of $150 is debited to Direct Materials Price Variance as an
unfavorable price variance:
Date Account Name Debit Credit
Mar. 1, 2010 Direct Materials Inventory 9,000
Direct Materials Price Variance 150
Accounts Payable 9,150
After the March 1 transaction is posted, the Direct Materials Price Variance
account shows a debit balance of $50 (the $100 credit on January 2 combined
with the $150 debit on March 1). A debit balance in a variance account is always
unfavorable—it shows that the total of actual costs is higher than the total of the
expected standard costs. In other words, your company's profit will be $50 less
than planned unless you take some action.
On June 1 your company receives 3,000 yards of denim at an actual cost of
$2.92 per yard for a total of $8,760 due in 30 days. The entry is:
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Date Account Name Debit Credit
June 1, 2010 Direct Materials Inventory 9,000
Direct Materials Price Variance
240
Accounts Payable 8,760
Direct Materials Inventory is debited for the standard cost of $9,000 (3,000 yards
at $3 per yard), Accounts Payable is credited for the actual amount owed, and
the difference of $240 is credited to Direct Materials Price Variance. A credit to
the variance account indicates that the actual cost is less than the standard cost.
After this transaction is recorded, the Direct Materials Price Variance account
shows an overall credit balance of $190. A credit balance in a variance account
is always favorable. In other words, your company's profit will be $190 greater
than planned due to the favorable cost of direct materials. Note that the entire
price variance pertaining to all of the direct materials received was recorded
immediately. In other words, the price variance associated with the direct
materials received was not delayed until the materials were used.
Examples of Standard Cost of Materials and Price Variance
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Let's assume that on January 2, 2010 Denim Works ordered 1,000 yards of
denim at $2.90 per yard. On January 8, 2010 Denim Works receives 1,000 yards
of denim and an invoice for the actual cost of $2,900. On January 8, 2010 Denim
Works becomes the owner of the material and has a liability to its supplier. On
January 8 Denim Works' Direct Materials
Inventory is increased by the standard cost of $3,000 (1,000 yards of denim at
the standard cost of $3 per yard), Accounts Payable is credited for $2,900 (the
actual amount owed to the supplier), and the difference of $100 is credited to
Direct Materials Price Variance. In general journal format the entry looks like this:
Date Account Name Debit Credit
Jan. 8, 2010 Direct Materials Inventory 3,000
Accounts Payable 2,900
Direct Materials Price Variance
100
The $100 credit to the price variance account communicates immediately (when the denim arrives) that the company is experiencing actual costs that are more favorable than the planned, standard cost.
In February, Denim Works orders 3,000 yards of denim at $3.05 per yard. On
March 1, 2010 Denim Works receives the 3,000 yards of denim and an invoice
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for $9,150 due in 30 days. On March 1, the Direct Materials Inventory account is
increased by the standard cost of $9,000 (3,000 yards at the standard cost of $3
per yard), Accounts Payable is credited for $9,150 (the actual cost of the denim),
and the difference of $150 is debited to Direct Materials Price Variance as an
unfavorable price variance:
Date Account Name Debit Credit
Mar. 1, 2010 Direct Materials Inventory 9,000
Direct Materials Price Variance 150
Accounts Payable 9,150
After the March 1 transaction is posted, the Direct Materials Price Variance
account shows a debit balance of $50 (the $100 credit on January 2 combined
with the $150 debit on March 1). A debit balance in a variance account is always
unfavorable—it shows that the total of actual costs is higher than the total of the
expected standard costs. In other words, your company's profit will be $50 less
than planned unless you take some action.
On June 1 your company receives 3,000 yards of denim at an actual cost of
$2.92 per yard for a total of $8,760 due in 30 days. The entry is:
Date Account Name Debit Credit
Faizullah khan Roll # A-522997
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June 1, 2010 Direct Materials Inventory 9,000
Direct Materials Price Variance
240
Accounts Payable 8,760
Direct Materials Inventory is debited for the standard cost of $9,000 (3,000 yards
at $3 per yard), Accounts Payable is credited for the actual amount owed, and
the difference of $240 is credited to Direct Materials Price Variance. A credit to
the variance account indicates that the actual cost is less than the standard cost.
After this transaction is recorded, the Direct Materials Price Variance account
shows an overall credit balance of $190. A credit balance in a variance account
is always favorable. In other words, your company's profit will be $190 greater
than planned due to the favorable cost of direct materials. Note that the entire
price variance pertaining to all of the direct materials received was recorded
immediately. In other words, the price variance associated with the direct
materials received was not delayed until the materials were used.
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Data collection methods
Data are collected by Financial Management books, online articles
Conclusions:
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From the analysis of organization about my topic I concluded that almost
progress of various departments of organization is satisfactory. Accounting
For Cash & Short-Term Investment Statement highlights the financial health
of levis denim because this analysis highlights the correct financial picture of
this organization. Due to this analysis financial analyst is able to compare the
financial position of Levis Denim with other organization. In this organization
financial manager is effectively using financial ratio to measure the financial
position of Levis Denim. The usefulness of ratios depends on ingenuity and
experience of financial analyst who employs them. Receivable and Turnover
ratios are very much useful and financial manager measure profitability in
relation to sales and investment by profitability ratio.
These analysis help financial analyst in comparing levis with other
organization who have data differ significantly in size because every item on
the financial statements gets placed on a relative, or standardized basis.
Although the overall financial progress of organization is satisfactory but
there are some inexperienced financial managers who choose inappropriate
analytical tool, which increase the business risk.
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Recommendations:
In order to avoid the misallocation of funds financial manager should
have to make the plan before of financial decision. This plan include
whether the investment required or not.
Levis denim should have to use a computer based spreadsheet program
for quickly analyzing financial statements.
To plan for the future the financial manger must assess the firm’s
present financial position and evaluate opportunities in relation to this
current position.
There is need of well-experienced financial manager, because
inexperienced financial manager cannot analyze the financial statement
in an effective way.
Company should employ a high experienced Financial person, to
analyze the market to utilize the short-term investment to get the
maximum profit.
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References
Book Business Law By Qazi Awais Amin
Organization data by Finance Manger –KIMS
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Levis Denim Limited
Levis Denim is now a medium size organization manufacturing a variety of
confectionery products e.g.
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biscuits, toffees, bubble gums, chocolates, candies etc, under the brand
name KIM. Established in 1995 as a
SME, the organization was conceptualized by a food scientist, namely Mr.
Qadir Mehmood. Chocolate and
candies were introduced in the product line in 1998, while instant drinks
under the brand name of U-Sip were
introduced in 2002. The company operates its factory in Hattar Industrial
Estate, located at a distance of about
50 kms from the main capital, Islamabad. It complies to quality standards of
ISO 14000, ISO 9001/2000 and
HACCP food safety requirements. It is currently exporting its products to 25
different countries, mainly in the
west e.g. USA, UK, Australia, Canada, Sri Lanka and Afghanistan.
Major Challenges
The year 2002 posed major challenges to the operations of the company. A
number of biscuit factories in Hattar
failed in their businesses and closed down. A prime reason was the end of
sales tax exemption period, which
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increased the cost of production by 15%. However, the financial crunch
increased substantially when sugar
crises occurred in the country and the price of sugar increased from PKR 10
to PKR 38 per kg, more than 300%
increase. At Silver Lake, the daily utilization of this basic raw material was 8-9
tons, which led to a massive
increase in the cost of production. A major challenge for the company thus
became reducing its costs of
operations, enhancing sales volumes and improving the overall productivity
of the organization.
Productivity Improvement Plan
In July 2005, at a time when contemporaries were closing down their
factories due to high cost of production
thus rendering the business unprofitable, Mr. Mehmood embarked upon a
productivity improvement plan to
reduce the organization.s cost of production. With the assistance of his
Quality Assurance Manager, namely,
Mr. Ishtiaq Hussain Kiani, quality parameters were set with a two-fold target:
wastage reduction and
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productivity enhancement. The targets were translated into department-
wise, machine-wise, process-wise, shiftwise
and variety-wise. A productivity implementation plan was put in place.
In the first couple of months of the plan, results were not very encouraging.
After few months, Mr. Mehmood,
also being the President of the Hattar Industrial Estate Association was
introduced to the National Productivity
Organization, Pakistan and became interested in seeking its assistance for
the improvement of its program.
NPO-Pakistan conducted an initial productivity audit of the company and
analyzed the major problems.
Subsequently, a productivity improvement plan was developed and fine-
tuned with the organization. A
productivity measurement criteria was put in place to measure
improvements. The management of Silver Lake
agreed on the following weaknesses:
1. High % of wastages in every product line . wastages of raw material and
packing material;
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2. Manpower motivation and participation . staff and workers were not
interacting to understand the
problems in process flows. Supervisors were not interacting with the top
management to take
immediate remedial measures in manufacturing. Staff participation was
minimal;
3. Role of Quality Assurance . the role of quality assurance was focused on
controlling quality;
Subsequently, the concept of quality control circles (QCC) in the factory was
introduced. Employees were
motivated to become more involved in identifying techniques to reduce the
wastages (especially of products and
wrappers) and improve efficiencies. Additionally, suggestion scheme was
introduced at all levels. The
employees were asked to give their suggestions and observations on a
machine-wise, process-wise basis, etc.
Subsequently, information and suggestions received from each department
were discussed in a weekly meeting
Faizullah khan Roll # A-522997
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of the departmental supervisors with the CEO. The decisions taken were
properly noted, implemented and
followed-up through an action plan.
Process reengineering was implemented: bottlenecks along the process line
from cooking to packing were
identified. In some cases, moulds were replaced, while in some areas,
number of human resource was
rationalized and skills were improved.
Emphasis was laid on introducing Total Quality Management at the factory.
The Quality Assurance Manager
participated in a TQM course and learned the importance of
becomingFacilitator than a controller. Henceforward, extensive training
on .Becoming a Facilitator. was imparted to an in-house team of 16 members
with
the assistance of the NPO-Pakistan. Trainers were trained in quality control
tools and their implementation; the
organization thus transformed its Quality Assurance Team into Facilitators to
assist in collection of data,
Faizullah khan Roll # A-522997
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implementation of QCCs, interaction within the employees, etc. NPO-
Pakistan also helped in sending the CEO
on an APO course to Japan; this interaction with members of other APO
member countries further facilitated in
knowledge sharing and improvement of the productivity and quality
program. Currently, the CEO is also
participated in the 6-week course of .Productivity Specialist. being
implemented by NPO-Pakistan.
Initiatives in Marketing and Promotion
The sales team of the organization was revamped and strategies were made
to expand into international
markets. The organization put up its stalls in international exhibitions in
Germany to penetrate other markets.
With the opening of post-Taliban Afghanistan market, Silver Lake
immediately entered into this new market.
Initiatives in Research & Development
Research on new products is carried out on regular basis. Consequently, two
new products were added to the
product line to meet increasingly competition and growing market demand.
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Initiatives in Technology Up-gradation
The factory has 100% locally manufactured machinery. However, changing
market needs have necessitated
technological adjustments in the plant. The Technology Manager has been
instrumental in indigenous upgradation
of the plant and machinery, and almost 60-70% currently installed has been
fabricated in-house. The
technology up-gradation has been one of its kind in Pakistan, and the
Manager has recently been selected for the
President.s Excellence Award by the Government of Pakistan.
Initiatives in Human Resource Development
Silver Lake does not have a specialized human resource function. However,
through its quality assurance
function, the organization has instituted a system of awards and incentive for
the human resource. On
achievement of targets, cash prizes are given. Best Performance Certificates
are given on annual basis. To
enhance motivation and interaction amongst the staff, frequent samosa and
cake parties are organized. A
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training policy has been defined and regular training programs are organized
for all levels of employees.
Results
With the productivity improvement plan implemented by Silver Lake, it was
able to prevent the business failure
and shut down. In one year, the major achievements have been as follows:
1. Cost Controls: Not only did it manage the exorbitant price hike of 300% of
the major raw material and
the decreasing trend in the sale price, the company made a saving of PKR.2-3
million per month;
2. Wastage Control: In its biscuit product line, the wastages were reduced to
0%, while in candy product
line, wastages were reduced to less than 1%;
3. Increased Production: Total capacity utilization of the factory improved
from an average 20 tons per
product line per day to 35 tons. The workers. productivity improved from
60% to 85%.
4. Improved Human Resource Attitude: The human resource has become
participative and involved in
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the operations of the company. The regular trainings have improved their
skills and attitude. The
supervisors are more responsible in putting across the suggestions of their
subordinates and
implementing the solutions for improving productivity of the machines and
labor. The human resource
realizes the importance of their role in the organization.
5. Facilitating Quality Assurance Department: the QA department facilitates
implementation of the
Productivity Improvement Plan and assists in coordination of efficiency-
related activities than
controlling them. Revised quality parameters have been put in place e.g. for
biscuit, quality parameters
are biscuit breaking, taste, texture, moisture/shape, weight, etc.
6. As a company which has transformed its operations in one year, the
company has become a role model
company for NPO-Pakistan. It is now on the intending to provide training
services in QCC to 100
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companies. The General Manager of Silver Lake has also been nominated to
be on the Central Steering
Committee on QCC being set up by NPO-Pakistan;
The organization is now envisaging implementing Just-in-Time methodology
to control inventory levels.
However, it feels that due to poor communication networks in the country as
well as infrastructural problems,
this is going to be difficult. Moreover, government restrictions on major raw
material (i.e. restriction of flour
purchase from one province to be sent to another due to flour crises in the
country) further restrict the inventory
purchases. In the future, Silver Lake intends to introduce new brands and
enter new markets.
Faizullah khan Roll # A-522997