International Journal of Economics and Business Administration

Vol. 2, No. 1, 2016, pp. 1-6

http://www.aiscience.org/journal/ijeba
ISSN: 2381-7356 (Print); ISSN: 2381-7364 (Online)

The Extent of Application of Standard Costing:

A Comparison of Chinese and Pakistani
Manufacturing Firms
Mula Nazar Khan*, Muhammad Rizwan, Fahad Islam, Zain Ul Aabdeen

Hailey College of Commerce, University Of the Punjab, Lahore, Pakistan

Abstract
The purpose of the study is to investigate the extent to which Standard costing and variance analysis is being used by Pakistani
and Chinese firms. It also investigates the difference in usage of Standard costing between Pakistani and Chinese firms. Data is
collected through questionnaires from 57 Chinese companies and 64 local firms. A close ended questionnaire has been used to
collect the data from the sampled companies. The researcher used referring/snowball sampling to approach the manufacturing
companies which were included in sample in this study. The questionnaire was adopted from the prior studies. Empirical
results Suggest that standard costing is still used in local and Chinese firms. SPSS software is used to test the data. Results
indicate that 71 percent of the Chinese firms and 69 percent of the Pakistani firms use the standard costing in their system. Our
Research is useful for the corporate managers while making decisions regarding Costing system.

Keywords
Standard Cost, Cost Control, Pakistan, Inventories, Chinese, Evaluation, Management Accounting

Received: March 28, 2016 / Accepted: April 7, 2016 / Published online: April 22, 2016
@ 2016 The Authors. Published by American Institute of Science. This Open Access article is under the CC BY license.
http://creativecommons.org/licenses/by/4.0/

convenience to compute production cost. It also helps in

1. Introduction preparing the business budgets, pricing products and
measuring the performance of managers by comparing the
Standard is a benchmark or quality and the predetermined
actual costs with standard cost. Standard costing is mostly
cost of a product or service is called standard cost. For
used in production companies where products are produced
example the cost of this BAL pen should be Rs.10 so the
constantly and permanently (Kucksavas, 2006).
standard cost of the pen isRs.10. Accordingly is are target
cost, which are incurred according to well organized According to various authors standard costing is inconsistent
operating conditions. There are many reasons for using with today manufacturing environment (Monden Y. a., 1993).
standards but the most frequent motive is because they Companies should use just in time system, process Re-
estimate product costing techniques. Standard costing is the engineering .Target Costing, Life cycle assessment, Total
traditional management accounting which has been used quality management (TQM) so they can meet the competitive
during the last century on a wide frontier (Ask U. A, 1997). global business .Authors says that these tools enhance the
The main reason for the using of standard costing is that ability of the corporation to meet the strategic objectives and
relying on actual costing could not provide managers also enables these companies to compete globally
appropriate data which are needed by managers. Generally Additionally, many have predicted that the shorter product
the purpose of the standard costing is to provide cost lifecycles, advanced manufacturing technologies, decreasing
information related to controlling cost, provide quickness and emphasis on labour in the production process and global

* Corresponding author
E-mail address: [email protected] (M. N. Khan)
2 Mula Nazar Khan et al.: The Extent of Application of Standard Costing: A Comparison of
Chinese and Pakistani Manufacturing Firms

competition may lead to their demis (Kirwan, 1986). output for a particular period. When it comes to the actual
However empirical evidences shows that a large majority of costs for the same period they are also charged to the
firms use standard costing for cost control by comparing the responsibility centers. The two costs, the standard and the
actual costs with standard cost pinpoint areas where cost is actual, are then compared and the variance between the two
going out control allowing the management taking remedial is reported (Drury, 1992). The manufacturing environment in
action and also used for decision making and performance Japan particularly has changed drastically as it has the
evaluation (Cornick & W. and Wilson, 1998). Since, the influence of these new technologies more than any other
introduction of standard costing in early 1990s, it has been country in the world. These changes in the manufacturing
widely used for various purposes by companies around the environment seemingly have reduced the significance of
world such as valuation of stock, cost reduction and standard costing especially as a cost control system
budgeting. Standard costing become more popular for
managers as a powerful control tool because it allow them to 1.1. Research Objectives
employ management by exception, where management The objective of this study is:
provides a fixed target and does not interfere as long as the
1. To examine the extent to which standard costing and
targets are adhered to or achieved; management intervention
variance analysis are being used by manufacturing
comes only in cases of deviations. Standard costing
companies in Pakistan
management by exception frees the management from
routine chores and places the focus on core issues (Chang, 2. To examine the extent to which standard costing and
2005). variance analysis are being used by manufacturing
companies in China
Standard costing is more suitable in operations where
activities consist of repetitive operations. In manufacturing 3. To examine and compare the management account
organization processes are mostly repetitive in nature and development in Pakistan and China
therefore standard costing is relevant in these kinds of
1.2. Research Questions
manufacturing organizations. Standard costing procedures
cannotbe applied to non manufacturing activities where 1. Is standard costing used in Pakistan?
operations are of repetitive in nature. However, standard
2. Is standard costing used in China?
costing cannot be easily applied to non repetitive activities,
as there is no basis for observing repetitive operations and 3. How important are various functions of standard costing?
therefore standards cannot be set. In organizations that 4. How important is the variance analysis for control
produce many different products and the production consist purpose?
of series of common operations it is possible to apply a
standard costing system (Drury, Practices of Standard
Costing, 1992). Technological developments and 2. Literature Review
globalization increase competition that firms face in order to The current prevailing view is that traditional management
survive. Manufacturing costs are one of the main tools that including standard costing cannot respond to changes in the
firms have still some control to compete in the market. nature and structure of organization. So management
Today, there is a debate about the usefulness of standard accountant are unable to provide information to the
costing in today’s manufacturing environmentt (Drury, 1999). management, that they needed for effective decision making
Some authors say that the benefits of standard costing is less and control in the manufacturing environment (Lyall & K.
evident in today’s manufacturing environment in fact and Puxty, 1990).
standard costing may lead to a dysfunctional behavior. For Especially standard costing is criticized in advanced
example a material purchase variance may encourage manufacturing environment that results in declining direct
purchasing the material in bulk in order to take advantage of labour costs and material cost reduce inventories and just in
discount, thus this resulting in high inventory holding costs. time production methods The criticisms increased especially
With respect the purchasing manager, this action, is during the second half of the 1980s. Some academicians
inconsistent with Just in time (JIT) Philosophy. Additionally affirm that the importance of standard costing and variance
the periodic standard cost variance reports prepared are analysis for cost control and performance evaluation
deemed less useful by managers as the information provided decreased due to the fierce competitive environment (Kaplan,
is “after the fact” (Lucas, 1997). 1987). In general, the criticisms of standard costing mainly
In standard costing system managers who are responsible for relate to today’s high competitive environment and
various operations trace the standard costs for the actual improving production technologies. The decreasing role of
 International Journal of Economics and Business Administration Vol. 2, No. 1, 2016, pp. 1-6 3

labour and shortened product life cycles caused large firms to 47 per cent of the companies’ surveyed used standard
plan their activities with different production philosophies costing. A later survey by Ghosh and Chan (1996) found the
such as Product Life Cycle Management, Just-in-Time percentage to be higher at 56 per cent. In Brunei, standard
manufacturing, Activity Based Management (ABC), and costing and variance analysis are widely used by
Total Quality Management. The firms use strategic cost international firms In Korea, standard costing is still favored
methods - namely ABC, Target Costing, Product Life Cycle by many firms). Out of the 115 electronics, electrical and
Costing for the calculation of production costs and their machinery firms that they surveyed, 44 per cent said that they
control these developments decreased the importance of used standard costing (Ahn T. a., 1994).
standard costing (Hilton, 2001). In thePhilippines, according to Diga (1997), standard costing
The most severe criticism came from Lucas (1997) “who procedures are being used by both medium- and large-sized
stated that the method has become obsolete, and it should not companies. Thus, the contention that standard costing is less
be included in cost accounting courses. However, standard relevant in today’s manufacturing environment, as suggested
costing continues to be incorporated in cost and management by authors others, may not hold true (Monden Y. a., 1993).
accounting textbooks and university course curriculum”. The The result of a study conducted shows that standards are
authors says that the standard costing is traditional
widespread within the Swedish manufacturing industry: 73
management tools and it is going to become obsolete and not
percent of the companies operate a standard costing system.
still used in manufacturing organizations due to the latest
Results of Ask and u are supported by a study conducted by
management accounting tools. Puxty and Lyall (1989), which reported that 76 percent of the
Contrary to the preceding arguments, studies examining the UK commercial and industrial organizations operate a
use of standard costing among companies in the developed standard costing system (Ask U. M., 1997).
and the developing countries have shown widespread use of Standard costing has been considered a very useful technique
the technique (Puxty, 1990). We are not always blessed with
for cost control, performance evaluation and determining the
recent studies, so have to make the best of those studies that
product costing. According to Mitchell standard costing
have been undertaken over the past decade or more. A study
provides a number of benefits in performance evaluation
conducted in UK found that 90 percent of 231 companies use such as:
standard costing for cost control. Of these 35 percent
companies says that information provided by standard Standard cost variances provide feedback information
costing is useful and also “essential”. Further 63 per cent of designed to help managers control operations in accord with
the managers whose companies have adopted standard the plans they have set. They highlight the difference
costing, felt that the technique is “very useful” for decision between the planned costs of a period and the actual costs
making and control. However, most managers in that study incurred over that time. Cost variances comprise several
perceived that standard costing was not useful to motivate different elements that together make up the total reported
subordinates (Lyall D. a., 1993). In Korea, standard costing is variance: 1. costing system errors, 2. inappropriate standards,
still favored by many firms. Out of the 115 electronics, 3. uncontrollable random factors, and 4. controllable
electrical and machinery firms that they surveyed, 44 per cent variances with operational causes (Mitchell, 2005).
said that they used standard costing (Ahn T. a., 1994). Japanese companies recognize that they have reached a
Standard costing has been widely used in developed strategic turning point and are adjusting their management
countries. Although the main purpose is to control accounting polices accordingly. They are moving away from
costs,standard costing has also contributed to managerial standard cost systems installed when the firms used to supply
activities such as budgeting and product pricing. For a stable product range to a stable market. Today’s vast array
instance, surveys that were performed during the 1980s and of products means that they are subject to rapid obsolesces,
1990s showed thatproduction firms mostly used standard and in addition, technological changes pose severe challenges
costing systems. The reported usage rates were 65% in Japan, to existing standard cost systems The results of the past
73% inSweden, 76% in England, 84% in Ireland, and 86% in surveys on the use of standard costing also confirmed the
USA (Horngren, 2008). view that standard costing was more popular in the USA than
in Japan (Morgan, 1989).
Studies conducted in Asian countries find that (which are
generally, developing) Mirror those of the developed
countries. In India 8 percent companies are surveyed and 3. Research Methodology
findings show that 60 percent of companies use standard
This study has been conducted using primary data. The
costing (joshi, 1995). In Singapore, Ghosh et al. (1987) found
population for this investigation is number of different
4 Mula Nazar Khan et al.: The Extent of Application of Standard Costing: A Comparison of
Chinese and Pakistani Manufacturing Firms

companies from manufacturing sector of Pakistan and China. The structured survey questionnaire based on standards used
This is a type of quantitative study. by the firms was sent to 80 Chinese firms and 100 local firms
of Pakistan. Out of 80 Chinese firms, only 57 companies
3.1. Sampling Technique/Procedures responded properly giving 71% response rate. Only 64 out of
The researcher used referring/snowball sampling to approach 100 Local firms of Pakistan responded showing 64%
the manufacturing companies which were included in sample response rate.
of this study. The population for this study is the
Table 2. Company Characteristics.
manufacturing sector. However, a sample consisting of 100
Pakistani and 80 Chinese companies was selected. The study Chinese Local
Net
is quantitative in nature conducted to find out whether or not Assets(Book Frequency Percentage Frequency Percentage
respondents use standard costing. Value)
0-100 million 15 26 8 13
3.2. Data Collection 101-200
9 16 11 17
million
Primary data have been collected through a structured 201-500
21 37 16 25
questionnaire. The researcher examined the standard costing million
Above 500
method which is being used in the manufacturing concerns. million
12 21 29 45
For this purpose, a structured questionnaire was mailed to a Total 57 100 64 100
sample of a population. The questionnaire was sent to the
The selected companies were classified according to the size
accounts department of the selected Chinese and local firms
of book value of each firm in rupees. From Chinese
of Pakistan. Either the account manager or the person
companies most of the companies fall in book value of 201-
responsible for the cost accounting was asked to complete the
500 million rupees which is 37% followed by 26% which are
questionnaire.
having 100 million or less. From the local companies most of
3.3. Questionnaire the companies are having book value greater than 500
million rupees which constitute 45%.
A close ended questionnaire has been used to collect the data
from the sampled companies. The questionnaire was adopted 4.1. Use of Standard Costing
from the prior studies. All the constructs were having good
Table 3. Extent of standard costing application.
reliability. The questions were related to the use of costing
procedures by the firms. Chinese(%) Local(%)
Yes 71 69
No 29 31
3.4. Software Package Total 100 100
The collected data were entered into SPSS software to On asking about the application of standard costing by the
analyze the descriptive statistics. Frequency tables regarding sampled companies, 71% of the total selected Chinese
use of costing methods, variance analysis, company companies use standard costing technique whereas in case of
characteristics have been constructed. Pakistan this technique is used by 69% of Local firms of
Pakistan.
4. Data Analysis/Results 4.2. Importance of Standard Costing
SPSS software has been used for data analysis and Table 4. Mann-Wittney-U Test.
descriptive statistics is shown in the form of frequency tables.
Chinese Local
It some responses are later than A Mann-Whitney U-test has Cost control and performance evaluation 3.22 4.39*
been conducted to examine the differences in responses Costing inventories 3.89 3.76*
between early and late responses. Frequency Tables are also Computing product cost for decision making 4.56* 3.51
As an aid to budgeting 4.47* 3.29
shown, e.g. respondents' companies names, financial
Note:* Significant at 5 percent
information, Assets, Profits, No of total employees working
in the respondent organization etc. Chinese companies use standard costing mostly for
computation of the product costing for decision making
Table 1. Response Rate. purposes. The secondary purpose of standard costing is to aid
Numbers sent Numbers Received Response Rate(%) in budgeting. These results are significant at the 5% level of
Chinese 80 57 71 significance. In local firm's standard costing is frequently
Local 100 64 64 used for cost control and performance evaluation followed by
 International Journal of Economics and Business Administration Vol. 2, No. 1, 2016, pp. 1-6 5

costing inventories, which are significant at the 5 % level. the expected results.So management take corrective action to
correct these areas.These firms also use standard costing for
Table 5. Setting labour and material standard.
costing inventories.Chinese firms use average of hitoric
Chinese Local method to set the labour and material standard. The type of
Standard based on design 4.23* 3.35 standard that is used by these firms is Averege of past
Observations based on trial runs 3.12 3.15
Work Study Technique 2.85 2.49 performance. Chinese firms review their standards annually.
Average of historical usage 3.21 3.47*
Despite many criticism standard costing is still used by
Note: M-W test * Significant at 5 percent companies in Pakistan and China.
Chinese companies develop and adopt costing standard based There are some limitations in the study which the future
on design and local firms take into account the average of researchers may solve it through further research.Firstly,
historical use of labour and mterial standard. sample size is very small.Secondly, this study consider only
manufacturing companies in the future study also include
Table 6. Type of Standard used by companies. combination of sectors. Thirdly, the Response rate is also
Chinese (%) Local(%) very low. Future Research will conduct case studies to
Maximum efficiency Standard 30 15 investigate this traditional tool of standard costing.
Achievable but difficult to attain Standard 25 32
Average past performance standard 37 35
Others 8 18
Total 100 100 References
The standard used frequently by the Chinese companies is [1] Ahn, T. a. (1994). Effect of Manufacturing Environment
Changes on Cost. Korean Accounting Journal, 32(5), 65-32.
the average past performance standard and maximum
efficiency standard. Local firms of Pakistan mostly follow [2] Ask, U. A. (1997). Standard Costing. Journal of Business,
average past performance standard and achieveable but 2(5), 34-78.
difficult to attain standard. [3] Ask, U. M. (1997). Is Standard Costing Still Used? Journal of
Business Society, 65-87.
Table 7. Frequency of reviewing standards by companies.
[4] Chang, S. L. (2005). Manufacturing Flexibility and
Chinese(%) Local(%) Manufacturing,Evidence from Motherboard Industry.
Monthly or quarterly 13 14 Management and Data System, 24 (12), 1115-32.
Semi-annually 44 27
Annually 16 38 [5] Cornick, M. C., & W. and Wilson, S. (1998). A Survey of
Continuously 27 21 Budget-Related Planning and Control. Journal of Accounting
Total 100 100 Education, 43(14), 213-39.

Most Chinese companies review their costing standards [6] Drury, C. (1992). Practices of Standard Costing. London:
semiannually. Companies 44% of the total follow and review Academic Press.
their standards semiannually and 27% review continuously. [7] Drury, C. (1992). Standard Costing In The Manufacturing
Local firm of Pakistan, which review their standards annually Environment. Journal Of Accounting, 54(32), 45-87.
are 38% of the total. [8] Drury, C. (1999). Standard Costing: A Technique at Variance
with Modern Management? International Business Research,
77(10), 56-58.
5. Conclusion [9] Hilton, R. (2001). Creating Value in a Dynamic Business
71 percent of the Chinese firms and 69 percent of the Environment. Managerial Accounting, 65(27), 65-87.
Pakistani firms use the standard costing in their system.With [10] Horngren, C. F. (2008). Cost Accounting. A Managerial
respect of the Chinese firms they use standard costing for Emphasis.
Computing product cost for decision making and as an aid to [11] joshi, P. (1995). The international Diffusion of New
budgeting,their standards are based on design, use Average Management Accounting Practices. Journal of International
past performance standard and review their standard Accounting and Auditing, 32(14), 85-109.
continiously. [12] Kaplan, R. &. (1987). Relevance Cost: The Rise and Fall of
Management Accounting. Harward Business School Press
On the other hand, 69 percent of the Chinese companies use Boston, 87(25), 65-89.
standard costing, they use their standard costing for cost
[13] Kirwan, (1986). Management Accounting Practice? A
control and performace evaluation which indicates that these consultant’s view. Pitman Publishing, 67(8), 65.
firm compare their actual cost with the estimated cost that
[14] Kucksavas, N. (2006). Administrative Cost Acounting.
pinpoint the areas that goes out of control and deviate from
Journal of Business, 32(4), 500.
6 Mula Nazar Khan et al.: The Extent of Application of Standard Costing: A Comparison of
Chinese and Pakistani Manufacturing Firms

[15] Lucas, M. (1997). Standard Costing and its Role in Today’s [19] Monden, Y. a. (1993). How Japanese Auto Maker Reduces
Manufacturing Environment. Journal of Accounting, 78(24), Costs. Management Accounting Journal, 21(6), 22-6.
32-4.
[20] Monden, Y. a. (1993). How a Japanese Auto Maker Reduces
[16] Lyall, D. a. (1993). Managers Attitudes to Cost Information. Costs. Management Accounting, 65.
Managment Decision, 41-5.
[21] Morgan, M. (1989). Japanese Management Accounting: Its
[17] Lyall, D. O., & K. and Puxty, A. (1990). Cost Control and its Contributionto the Japanese Economic Miracle. Management
Impact On Corporate Profit. Management Accounting, 76(11), Accounting, 40-4.
41-5.
[22] Puxty, T. a. (1990). Cost Control: The Manager’s Perspective.
[18] Mitchell, F. (2005). Management Accounting – Performance
Evaluation. Financial Management, 33-7. Management Acounting, 46-7.