Reporting of overhead variances: a cost management perspective

2012

In the early 1920s, direct labour comprised most of the total cost of manufacturing, and allocating overheads using direct labour hours or direct labour cost was sufficient for inventory valuation purposes, which was then the primary object of cost accounting. However, the upsurge of manufacturing overhead as a percentage of manufacturing cost at the expense of direct labour and proliferation of product lines complicated the otherwise relatively straightforward process of overhead cost allocation. Empirical evidence demonstrates that our understanding of how best to allocate overheads is at a nascent stage, and surprisingly most managers still do not know their costs. Moreover, managers have grave concerns about the current practice that allocates overheads to products in an arbitrary fashion. These concerns stem from the fact that managerial decisions are based on cost information furnished by management accountants, which is ostensibly inaccurate. This conceptual discussion paper ...

East Asian Journal of Multidisciplinary Research, 2023

Standard Costing and variance analysis are a set of management accounting tools that assist industries in controlling the cost of production. It involved the establishment of a cost standard that is required, and the standard cost was applied for comparison to the product's actual cost. This article aimed to critically explore and assess the applicability of using standard costing and variance analysis as management accounting tools in today's varied worldwide industries. By compiling the findings from various scholars and researchers, this article primarily examines what standard costing methods and variance analysis are, as well as their advantages, limitations, and usefulness. Moreover, the proposed research framework on the motivation of industries in standard costing technique adoption and recommendations were added for future research purposes in this article. As a result, the article successfully concluded that standard costing techniques and variance analysis were relevant and crucial management accounting tools for industries today.

Journal of Finance and Investment Analysis, 2013

Cost plays a prominent decision making role in the life of an individual and organisation because it is a central focus of daily financial activities. In any financial engagement, usually for a reward, the costs that are incidental to the engagement could be broadly analysed into material, labour and overhead. For an organization to break-even and proceed to record profit, costs must be controlled so that they can be within acceptable limits. This is achieved through setting costs standards and formulated process of comparing the standards against the actual costs, which ordinarily gives rise to variance. One simple question is that: will costs variance analysis be exceptionally relevant irrespective of any standard set? The objectives of the study are to review and analyse literature to find out what constitutes efficient standard in a manufacturing organisation with a view to disclosing realistic variance for management cost control and based on the review and analysis to assess t...

SSRN Electronic Journal, 2011

While both U.S. GAAP and IFRS require inventory to be valued using absorption costing, prior to IFRS convergence, Danish GAAP permitted, but did not require, variable costing for financial reporting. Upon convergence, firms that had initially reported using variable costing were required to retrospectively adopt absorption costing. As a result, these firms were required to restate inventory under absorption costing for the prior year. Danish firms thus produced audited financial statements under both variable and absorption costing for the year prior to adoption of absorption costing. This unique setting allows us to observe the amount of fixed manufacturing overhead included in inventory in the pre-adoption year. In our setting, since the financial statements were initially prepared using variable costing, we have an opportunity to examine financial statements prepared using absorption costing, where management had no incentive to overproduce in order to manage earnings. In addition to documenting the extent of overhead in inventory in the absence of incentives to overproduce, we study the incremental and relative information content of earnings under each of the inventory valuation methods and compare earnings quality between the two methods. We find that variable costing is incrementally informative over variable costing, and weak evidence that the reverse holds as well. We find no evidence of a difference in relative information content. Finally, we find that absorption costing results in smoother earnings than does variable costing, which is consistent with higher earnings quality under absorption costing.

Product costs are a significant determinant of both short-term and long-term decisions of businesses in terms of goal achievement. In determining the costs, businesses are expected to consider both the characteristics of the market (demand) and the business itself. Product costs are calculated by cost calculation methods. Cost calculation methods are normal costing method, full costing, variable costing. Full costing treats the costs of all manufacturing components (direct material, direct labor, variable factory overhead and fixed factory overhead) as inventoriable, or product, costs. Variable costing is a cost accumalition method that includes only variable production costs (direct materal, direct labor and variable factory overhead) as inventoriable, or product, cost. Normal costing method takes into account all the variable parts of production costs. The method handles fixed operating costs according to the rate of capacity utilization. In this study, the effects of choosing either full costing , variable costing or normal costing on costs in terms of varying amounts of production are analyzed

2004

The British Accounting Review, 1990

Most large manufacturing firms select cost variances for investigation by using cutoffs of fixed amounts or fixed percentages of the standard. This paper reports simulation results that these two commonly used rules are effective, but not efficient, in identifying out-of-control situations. Also, both rules are susceptible to an expost selection bias and tend to erroneously indicate shifts in cost means. In contrast, while random sampling was neither effective nor effkient, it provided a much more accurate picture of the underlying cost means. These results suggest that it may be desirable to use different selection rules to support different aspects (e.g., standard setting versus performance evaluation) of the control process. In recent years, intensifying global competition has greatly increased the importance of production efficiency to manufacturing firm viability and profitability (Kaplan, 1983; 1984). In a survey of senior corporate managers, 78% cited cost containment and productivity improvement as their top two priorities (McComas, 1986). Recent surveys have reported that the majority of large manufacturing firms exercise. cost control through standard cost systems (Laudeman & Schaeberle, 1983; Cress & Pettijohn, 1985; Schwarzbach, 1985). Since management time is a scarce resource, typically only the 'exceptional' cost variances are selected for further investigation. Even though many quantitative models have been developed to guide variance selection [see Kaplan (1975) for a review], this decision still tends to rely on simple rules of thumb. Over 95% of Cress & Pettijohn's (1985) respondents indicated

international journal of research in computer application & management, 2013

The present world of cut throat competition coupled with increasing consumer demands and product differentiation makes the traditional costing redundant and widely responsible for strategic failures. Traditional costing apportions indirect expenses on irrational basis to discrete product lines and services. Activity Based Costing (ABC) contemplates a paradigm shift in overhead allocation through scientific means commonly known as cost drivers. In this paper, we trace the development of concepts and techniques of cost accounting that have shifted the attention of the management practitioners towards alternative methods of costs allocation. This paper highlights the distinctive features of ABC for ascertaining true product cost. Undoubtedly, ABC is a definite improvement over the traditional methods on the premise that the costs are collected on the basis of activities rather than products and it can effectively contribute to the top managerial decision making process based on product, customer and geographical profitability.