The Importance Of Retaining The Standard Costing System Utilised By The Company, Active Sports Limited ( Asl )
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This case study is a critical evaluation addressing the implications of retaining the standard costing system utilised by the company, Active Sports Limited (ASL), and provides appropriate recommendations as per the CFOs request.
Due to the recent reduction in sales revenue from 1 March 2014 to 28 February 2015, the Operations Manager considers that the standard costing principles employed by the firm no longer meet the business requirements in respect of continual improvement and responding to individual customer needs. And while the standardisation of services has led to reduced costs, it was achieved to the detriment of customer service and individuality which has ultimately led to a reduction in sales revenues over…show more content… • Variances can be calculated which enable the principle of 'management by exception ' to be operated. Only the variances which exceed acceptable tolerance limits need to be investigated by management with a view to control action.
• Standard costs and variance analysis can provide a way of motivation to managers to achieve better performance. However, care must be taken to distinguish between controllable and non-controllable costs in variance reporting.
Limitations of the standard costing system
• ‘McDonaldisation’ of society has led to reduced costs, but at the risk of reduced customer service and individuality. Driving down costs is often associated with reduced quality, wastage, idle time, and lack of attention to the individual needs of customers (cimaglobal.com). These factors contradict the philosophies associated with Total Quality Management (TQM) and Just in Time (JIT). JIT aims at zero wastage and increasing efficiency.
• This system does not consider impact on customer, how product prices are justified and product quality.
• It directs resources towards past while business objective is achieved by looking into future. This factor appears to contradict modern thinking about the direction in which business practice is moving in many areas of the economy.
• Holding the person responsible for adverse variances could result in demotivation.
• Once targets are achieved, there would be no motivation to improve performance