Review the Standard costs: wake up and smell the coffee.article. When evaluating performance, many organizations compare current results with the actual results of previous accounting periods. Is an organization that follows this approach likely to encounter any problems? Explain. Question 2:Flexible budgets provide different information than static budgets. Discuss some of these differences. Is a flexible budget always better? Are there times when you?d recommend using a static budget over a flexible budget?

Standard costs: wake up and smell the coffee A report by KPMG, in association with CIMA, has highlighted serious shortcomings in standard costing information in many large manufacturing organisations. This highlights the vital role management accountants have in filtering information up and influence down in a 'percolator effect'. The economic crisis and price volatilities have prompted the question: is there a better way of calculating standard costs? To help answer this, KPMG in the UK undertook global research with large manufacturing groups into current trends and issues around standard costing. Simon Osmer, partner, KPMG, who led the research, said: 'Standard costing is an art rather than a science. Our survey noted significant deviations in usage, sophistication, frequency, calculation and methodology which surprised us. The best costing methods supported the business through the recent economic storm. The worst were found wanting'. According to CIMA, standard costing is a 'control technique that reports variances by comparing actual costs to pre-set standards so facilitating action through management by exception'. All companies in the survey use standard costs and variances to value inventory for statutory purposes, for management reporting purposes and for performance measurement and management. But despite its prevalence, no respondents are finding it easy to obtain the information and insight required to satisfy all three of these areas. The key findings of the research are as follows. Standard costing is sometimes over used as a decision making tool Where standard costing is used, its limitations are not always fully understood with users often treating it as a science rather than an art. Many companies are moving away from using standard costing as their primary tool for pricing or global supply chain sourcing decisions. Comparability of standard costs and variances can be compromised by inconsistent local application of global methodologies Many groups have one global approach but only a few can claim globally consistent application. The best groups invest in governance and organisation structures to maintain the right balance between efficiency and insight Centralised and focused variance calculation frees up local resources to focus on analysis, interpretation and action. Understanding the key components of a standard product cost is vital At times using an extract of the standard cost card may be more appropriate to support certain business decisions - for example, using direct costs only to support marginal production decisions. The best companies had more than one cost per stock keeping unit (SKU). So they had the functionality to identify just direct costs, best ever standard, asset optimised standard, local country standard and global standard for each SKU. Increased economic volatility is leading to more frequent standard cost updates In general companies are updating standard costs on an annual basis, however the trend is towards allowing more frequent updates in particular where significant underlying cost changes have been seen. Policies and practices around absorption of overheads in standard costs vary Recent trends towards centralisation of support functions have often led to inclusion of what are now central overheads in standards despite the lack of control over these at a factory level. Standard costs can be used as aspirational performance targets but care should be taken to ensure they do not bake inefficiency Inclusion of wastage, scrap or under use of assets in standards can lead to inefficiency on the shop floor and hence value leakage. Effective performance management focuses on controllable costs Costing effort, variance analysis and remediation activity should focus on the controllable elements of performance. Levels of automation vary but spreadsheets remain rife No respondents are finding standard costing easy or effortless, this is a resource intensive process. Leading groups are struggling to fully automate standard costing globally within ERPs and still rely in part on spreadsheets. According to the report, standard costing is an important financial tool that is often used to determine dimensional profitability, for example, the profit by customer, by product and by channel. Standard costing needs to be considered in a wider framework of business intelligence where companies are seeking to improve performance and competitiveness. Ensuring that the right information is delivered to the right people at the right time and focussing on how strategies and operations are connected can improve strategic competitiveness. There is a growing recognition from all interviewees that more sophistication is required around their costing methodology. Leading companies are using extracts of the standard cost card most relevant to a particular business decision or calculating more than one standard cost card to drive different behaviours, for example: use only direct costs for marginal production decisions build an alternative cost card based on an assumption of full asset utilisation build an alternative cost card based on best ever achieved cost. Further research by Cambridge University, commissioned by KPMG, indicates that as much as 50% of management do not trust the information presented to them. This is due in large part to the use made of the information as well as the governance models deployed around it. In many organisations there is inconsistent ownership and application of definitions and standards. Many global companies are finding that communication regarding standards is misinterpreted, which makes like for like comparison difficult, if not impossible. Further challenges are that the information is not produced through a trusted channel and much manipulation of data is required. Organisations that have solved this problem are able to significantly reduce the cost of information delivery, speed of production and improve the usability. CIMA commentary In a comment in the report, CIMA CEO, Charles Tilley, said: 'This research illustrates the importance of ensuring the right information is made available and used effectively. This provision of the most relevant management information and its proper use is part of a much wider issue of significance to business leaders and management accountants. 'The Walker Review, which scrutinised corporate governance in the UK financial sector, highlighted the need for non executive directors to be better informed and more engaged. But non executive directors can never be close enough to the business to be certain of their precise information needs, nor to influence management's decision making at an operational level. This is because good governance at board level is a necessary but not a sufficient condition to ensure good performance and risk management. 'It is difficult for the decision makers in any organisation to maintain a keen understanding of its competitive position, drivers of value, potential risks or even its fundamental economics; its revenues and costs. 'Management accountants have a vital role to play in filtering the financial and other management information - including leading indicators and analysis about position, costs, performance, risks and opportunities - that is provided to decision makers. They can also help to implement strategy and cascade performance and risk management throughout the business. This \"percolator effect\" is essential to ensuring not only good governance but also the proper management of the firm in the long term interests of shareholders and other stakeholders. 'The shortcomings in costing information found in this KPMG survey illustrate why this percolator effect, with information filtered up and influence cascaded down, is crucial. In my opinion it's time to wake up and smell the coffee. 'Leading organisations are already transforming their finance functions to be more efficient and provide better information to enable evidence based decision making. They are also developing and deploying management accountants who can influence performance and risk management in the long term interests of stakeholders. Organisations not transforming their finance function in this way could be putting their competitive position at risk.' For more detail and analysis, read the full report 'Standard costing: insights from leading companies' available on our Decision making page . Links Read and comment on Peter Simons' blog on standard costing. CIMA Mastercourses for courses on costing, including 'Time driven activity based costing' KPMG cost optimisation. Contact us Insight is CIMA's emagazine for management accountants. It is sent to 140,000 students and members every month. Please email insight@cimaglobal.com with editorial comments, questions and suggestions, and advertising@cimaglobal.com for advertising questions and rates