Question

Discuss three reason why the use of a standard costing system is considered inappropriate in a company that operates in an advanced manufacturing technology environment

Answer 1

Advanced Manufacturing Technology

Advanced Manufacturing Technology (AMT) is revolutionizing the way products are manufactured especially in what are termed world-class manufactured especially in what are termed world-class manufacturers (WCM). AMT is a general expression encompassing Automated production technology, Computer Assisted Design and Manufacturing (CAD/CAM), Flexible Manufacturing Systems (FMS), robotics, Total Quality Control (TQC), advances in production management including materials requirement and manufacturing resources planning systems(MRP), Just-in-Time (JIT) Systems and so on. It has been argued by a number of academics, consultants and industrialists that traditional management accounting systems and performance measures are inappropriate and misleading for firm using AMT. This view is supported by Kaplan (1996) when he said that “traditional management accounting produces‟… simple the wrong measures. They move the company in the wrong direction, reward managers for damaging the business and provide no incentive for improvement. The best we can do is to switch them off, just stop doing them!”

Three of the reasons that specifies the use of a standard costing system is considered inappropriate in a company that operates in an advanced manufacturing technology environment :

• Controversial materiality limits for variances.
• Nonreporting of certain variances.
• Low morale for some workers.

Controversial materiality limits for variances Determining the materiality limits of the variances may be controversial. The management of each business has the responsibility for determining what constitutes a material or unusual variance. Because materiality involves individual judgment, many problems or conflicts may arise in setting materiality limits.

Nonreporting of certain variances Workers do not always report all exceptions or variances. If management only investigates unusual variances, workers may not report negative exceptions to the budget or may try to minimize these exceptions to conceal inefficiency. Workers who succeed in hiding variances diminish the effectiveness of budgeting.

Low morale for some workers The management by exception approach focuses on the unusual variances. Management often focuses on unfavorable variances while ignoring favorable variances. Workers might believe that poor performance gets attention while good performance is ignored. As a result, the morale of these workers may suffer.