Page 152 - Finance for Non-Financial Managers

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Cost Accounting
statements that take several weeks or more to prepare may not
be available soon enough to help managers adjust their per-
formance in the next month. Lessons learned from January 133
reports issued at the end of February cannot be put into use
until perhaps March, leaving January’s mistakes to be repeated
in February. In a fast-moving or highly competitive or slim-mar-
gin business, that may not be acceptable to alert management
teams. Thus, in recent years technology advances have fostered
the growth of “real-time” accounting—systems that collect
accounting information continuously and provide selected man-
agement reports on demand, without the need to formally
“close the books.”
In the manufacturing environment, the short-term answer
to this need has traditionally been standard costing, a term
that means using standard costs in lieu of actual costs in the
accounting for individual manufacturing steps. Standard cost-
ing is a way to estimate the actual cost of a unit for purposes
of prompt financial reporting, while still leaving a way to
return for more detailed analysis later. Standard costing is a
way to carry the budgeting process down to the components
of unit cost, so that a company can budget for units of direct
labor and raw materials for each unit of finished goods that it
plans to produce.
We’ll cover budgeting
and variance analysis in
Standard costing A
some detail in Chapter 10, management tool used to
and we’ll return to the sub- estimate the overall cost of
ject of standard costing, a production, assuming normal opera-
common method of budg- tions. Standard costs, rather than
eting the unit costs of pro- actual costs, are used in accounting
duction. There’s a strong for steps in a process, assuming an
efficient plant operating at normal
connection between budg-
capacity.The standard costs and actual
eting and standard costing;
costs are then compared and causes
the commonality will be
of variances are explained in terms of
very evident in the discus- price or quantity.
sion of variance analysis.