The impact of standard cost as a cost control tool in the automobile industry in Durban, KwaZulu-Natal, South Africa

Abstract

Standard cost variance analysis is a recognized expenditure control technique that has been used as part of firm’s accounting function over the years. Nevertheless, there have been wide debates about its functionality in the current era. The research problem was framed around the relevance, functionality and viability of standard cost. The objectives focused on the relevance and effectiveness of standard cost as budget control tool in the automobile industry in Durban, Kwazulu-Natal, South Africa. The research questions tapered towards the critical factors affecting the relevance and effectiveness of standard cost analysis as well as its contribution to cost management and this profitability of automotive firms in Durban, South Africa, in 2021. While, the study found mixed opinions on applicability of standard cost to extant automotive firms in some regions of the global economy, there is an inclination towards its effectiveness in some automobile firms Durban, Kwazulu-Natal, South Africa. Content analysis method was employed in the study considering its suitability for social science work and also the qualitative nature of the data collected. Cost management was found to be a source of profitability and thus competitive advantage for a number of the automotive firms surveyed. For instance, managing cost by diversifying supplier base served as a robust source of cost management, through which considerable information regarding domestic macroeconomic and international automotive market condition were gleaned. Standard cost variance analysis was described by some respondents as being relevant for the automotive sector in the geographic scope of the research, under differing conditions. As for instance, being more unsuitable for variable cost over foxed cost functions, in addition to mixed responses to strategies employed in standard cost technique adoption. Furthermore, some firms indicated that they combined balanced scorecard with standard cost method, while others did not use standard cost with any additional management tool. A few firms stated the viability of this tool for periodic forecasting which improves cost management, while others operating certain business models including retail and warranty-base firms indicated its unsuitability. Customer budgets and quality specification was found as effective in cost management. Other firms stated that operating without standard cost would culminate in bankruptcy. External considerations such as fluctuating macroeconomic outcomes of exchange rates and high shipping costs affected the viability of standard cost analysis. The structure, composition and nature of variable and fixed costs in the total cost function of automotive firms in Durban, Kwazulu-Natal, South Africa should be factored as key managerial accounting practice tools for maintaining expenditure within budget limits, towards the objective of profit maximization. These can as well enhance the sustenance of economies of scale. In addition, technology management principles can be incorporated curtailing the variable cost component, while advanced statistical methods can be employed to cushion the radical effect of variable cost which are less stable than fixed cost. This will help ease the challenges associated with variable cost budgeting. Further research on the feasibility of standard cost variance analysis should be undertaken within a wide spectrum of industries, with the objective of shedding more light on the effect of this cost control mechanism.