Evaluating standard costing systems and variance analysis procedures in the local pharmaceutical and medical supplies industries

Abstract

Standard costing is a management tool which has developed over the years in order to accommodate the needs of the personnel using it. This tool has been used to assist managers in the decision-making process and also as an aid to problem solving. The key role of standard costing is to ensure that the company's activities are efficiently monitored in order to exercise immediate control actions to remedy the situation accordingly. Company processes may be monitored using variance analysis; a tool which is normally implemented within a standard costing scenario. Variance analysis is used as a benchmark in order to compare actual costs with standard costs established at budget preparation stage. In the past decade, standard costing and variance analysis have been criticised with regards to their relevance in an advanced manufacturing environment. The relevance of these tools is perceived to have diminished as competition continues to increase in today's dynamic era. Some information derived from this system has been criticised as being out-dated, since the system may be based on past performance. This dissertation investigates these arguments within the pharmaceutical and medical supplies industries. In fact, the main objective of this study is to evaluate the standard costing systems and variance analysis procedures which are being employed in these industries. This study has been carried out in order to shed light on the costing systems being used in practice and to give other related information on certain identified aspects of these systems. The research findings reveal that standard costing and variance analysis are popular techniques within the sample of companies interviewed. Furthermore, a company which is still establishing its costing system is planning to start using these methods. Thus, the findings contradict the several criticisms which have been made, since these tools are still considered to be relevant and useful in an advanced manufacturing environment. Standard costing and variance analysis are still being used for control and performance evaluation purposes. As a result of the above, companies not using standard costing and variance analysis have been advised to do so, in order to start benefiting from the various advantages which these tools offer. Most importantly, using these techniques will enable a company to improve its performance and would thus be able to compete alongside other companies within their respective industries. This, in turn, will be an important element assisting a company to achieve its long-term objectives and its overall mission. Many have predicted the demise of standard costing, but despite all the arguments brought forward against it, standard costing is still practiced in today's advanced manufacturing environment. It seems that this prediction is quite farfetched and will remain so until a new and better system surpasses the usefulness provided by the standard costing method.