From the first e-activity, the article indicates approximately 90% of the companies in the study were sensitive to the variances in material prices. Examine the causes of material price variances and
From the first e-activity, the article indicates approximately 90% of the companies in the study were sensitive to the variances in material prices. Examine the causes of material price variances and the potential impact on pricing decisions.
Examine the reasons service companies are more sensitive to labor and price variances, as compared to material price variances, in the industrial sector and why managing these variances is essential to sustaining profitability.
MANAGEMENT ACCOUNTING QUARTERL Y
WINTER 2010, VOL. 11, NO. 2
espite claims that it is less relevant than
newer accounting methods, standard cost-
ing is far from obsolete, and, in fact, it is
experiencing common use in countries as
diverse as the United Kingdom, Malaysia,
and the United Arab Emirates. With the advent and
wide use of methods such as activity-based costing
(ABC), Just-in-Time (JIT), the balanced scorecard, and
target costing, a number of researchers had predicted
the demise of standard costing and variance analysis on
the grounds that these tools had become disconnected
from actual practices at the industry level where an
intense competitive environment often requires a
higher level of sophistication in costing systems.
For example, Richard Fleischman and Thomas
Tyson claimed that standard costing cannot provide
adequate assistance in the areas of construction strategy
and operational management.
Don Hansen and
Maryanne Mowen went so far as to describe it as poten-
These criticisms have largely
contributed to the dismissal of standard costing,
especially for large companies that employ more
sophisticated methods such as ABC and target costing.
Mike Lucas has even raised questions as to whether it
is still appropriate for college accounting programs to
continue teaching this “outdated” topic.
While several academics were busy pointing out the
weaknesses of standard costing, others observed that
this accounting tool continues to be widely used
throughout the world. Studies conducted in developed
countries have shown rates among companies as high as
73% in the U.K. and 86% in Japan.
More specifically, David Lyall and Carol Graham
stated that more than 90% of 231 companies surveyed
in the U.K. apply standard costing for cost control pur-
poses. Furthermore, they found that 63% of the man-
agers using this technique reported being pleased in
Is Standard Costing
Evidence from Dubai
EPORTS OF THE DEATH OF STANDARD COSTING ARE GREATLY EXAGGERATED
RESULTS OF OUR STUDY OF COMPANIES BASED IN
ECAUSE OF ITS SIMPLICITY
STANDARD COSTING REMAINS A FAVORITE COST
ACCOUNTING METHOD AMONG ACCOUNTING AND FINANCE PROFESSIONALS IN BOTH
INDUSTRIAL AND SERVICE SECTORS IN THIS RAPIDLY EXPANDING PART OF THE GLOBE
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MANAGEMENT ACCOUNTING QUARTERL Y
WINTER 2010, VOL. 11, NO. 2
terms of its decision-making support.
In another study,
76% of 303 accountants in the U.K. and 73% of 85
finance and accounting specialists in New Zealand use
The authors also found that accoun-
tants viewed modern costing and production manage-
ment tools as having no impact on how widely standard
costing and variance analysis are used. (The respon-
dents even predicted an increase in the importance of
the older tools.) A study by Maliah Sulaiman, Nik Nazli
Nik Ahmad, and Norhayati Mohd Alwi of companies
doing business in Malaysia found similar widespread
dissemination and persistence of standard costing: 70%
of 66 local firms and 76% of 21 Japanese firms.
These studies reveal that standard costing does not
overemphasize cost control, and, moreover, it is linked to
quality management. In addition, the Lucas and Sulai-
man studies have shown that companies use past perfor-
mance (“after the fact”) instead of predetermined
engineering standards on actual costs. Instead of em-
ploying newer and costlier systems, companies have cho-
sen to reconfigure existing systems with more rigorous
schemes, implying that firms have adapted standard cost-
ing to their specific needs and have not abandoned it.
In light of conflicting views in the academic research,
we examine how standard costing and variance analysis
are used in one of the world’s fastest-growing
economies: Dubai, one of the seven emirates, or states,
in the United Arab Emirates. A number of events make
our case study appealing, including the steps the Dubai
government has taken to free up prices and wages,
rationalize indirect taxes, deregulate the financial sys-
tem, promote foreign direct investment, and encourage
all companies to use new information and communica-
tion technology. To our knowledge, this study is the
first of its kind to shed light on the level of use of stan-
dard costing tools in Dubai.
Our study differs from the earlier study by Sulaiman,
et al., in that, while they split their sample on the basis
of ownership (Japanese vs. local), we disaggregated the
companies by sectors: industrial vs. service. We did this
for two reasons. The first is contextual: By law, foreign-
ers in Dubai cannot own 50% or more of a company
unless that company is located in the free zones.
it is just not possible to differentiate between nonlocal
and local companies in Dubai. Second, by studying the
service sector separately, we capture its importance in
terms of its contribution to Dubai’s gross domestic
product (GDP). The reason also relates to the fact that
the service sector has been studied less than the indus-
trial sector when it comes to the use of standard costing.
A plausible explanation for this might be the perception
that standard costing is not appropriate for the service
sector and the claim that service companies distance
themselves from it. Therefore, we address the following
Is standard costing used in Dubai?
How important are various functions in standard
How frequently are various techniques and cost
standards used in standard costing?
How important is the analysis of variance for con-
We collected the data presented here through a survey
questionnaire, and we had a reasonably good response
rate. We chose the companies randomly, covering all
subcomponents of the industrial sector and the service
and trading (retail) sector, which together constitute the
“private sector” in Dubai.
To design our questionnaire, we modified those of
Colin Drury, Chris Guilding, and Sulaiman to allow us
to compare our study findings with those that looked at
U.K. and Malaysian companies.
We created the ques-
tionnaire, which consists of demographics, characteris-
tics of cost accounting tools, and standard costing
practices in Dubai, to answer the following questions:
Do accounting and finance professionals in Dubai
use standard costing or some other method to make
Which techniques are used in standard costing in
relation to standards based on design/engineering
studies, observations based on trial runs, work/study
techniques, or average historic usage?
How are various types of costing standards practiced
by Dubai companies with respect to maximum effi-
ciency standards that are achievable but difficult to
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