Download - 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:


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

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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.


http://www.accountingcoach.com/terms/D/direct-materials-inventory.html

http://www.accountingcoach.com/terms/D/direct-materials-price-variance.html


http://www.accountingcoach.com/terms/A/accounts-payable.html

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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:


Mar. 1, 2010 Direct Materials Inventory 9,000

Direct Materials Price Variance 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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June 1, 2010 Direct Materials Inventory 9,000


240


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:


Jan. 8, 2010 Direct Materials Inventory 3,000



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:


Mar. 1, 2010 Direct Materials Inventory 9,000

Direct Materials Price Variance 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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June 1, 2010 Direct Materials Inventory 9,000


240


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


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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,


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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.
