History and Profile of Orica Limited
In this study we are focusing on the discussion of various aspects of standard costing. For fulfilling this purpose we have taken into consideration Orica Limited. This company is based in Australia. The organisation has over 11,500 employees and contractors. The ICI house now known as the Orica house was one of the tallest buildings in (East Melbourne), during the year 1950. This building was one of the very first tall high-rise building in the city of Australia’s cities. It is one of the few post-war office buildings in recorded in the (Victoria Heritage Register). The company runs its business across hundreds of countries and deals in the supplying of commercial explosives for mining, oil and gas industries and so on. “Minova” is a member of “Orica group” and its products and services involve the following items- steel bolts and plates, glass-fibre reinforced polymer bolts, injectable chemicals and foams, mesh, resin capsules, cementitious grouts and coatings, pumps, soil anchoring systems, ballast bonding polymers, accessories and engineering services. Here we discussing the explanation and characteristics of standard costing. how it impacts the planning and controlling processes of the above mentioned company and whether it is suitable for Orica Limited or not.
Orica Limited was founded in the year (1874) and the initial name of this company was (Jones, Scott & Co.), which functioned as a supplier of explosives at the time of “Victorian Gold Rush” and it was bought by (Nobel Industries). Later on, this company got merged with a couple of British chemical manufacturers and was given the name of (Imperial Chemical Industries). In the year 1928 this company which was functioning in Australia and New Zealand got integrated to amass and correlate all the “Australian interests” of (ICI Plc).
In July 1997, (ICI Australia) became an autonomous “Australasian” business after the parent organisation, ICI Plc, dispossessed “62.4 percent” of its shares in this business. As a result, the ICI Australia needed to change its name to the present name off the company on (2nd February, 1988). In the year 2010, Orica broke away from (Dulux Group) and focused on channelling its activities towards “mining, infrastructure and construction industries”. In (November 2014), the organisation declared the sale of its chemical business to “Blackstone Group”. The deal got completed on (2nd March, 2015) and it was given the name “Ixom” under which it is functioning at present.
Orica Limited is a multinational organisation, the headquarter is located at Victoria, East Melbourne in Australia. There are several key personnel who have the responsibility of running the organisation, they are- (Malcolm Broomhead) “Non-Executive Director and Chairman” and (Alberto Calderon) “Managing Director and CEO”. The organisation earned a revenue of “AUD $ 1.5 billion” in the year 2016, the net profit after tax which contributed to the shareholders earnings on (30 September, 2016) was $ 343 million. Orica Limited is also co-sponsor of “Orica-Scott” (men’s and women’s) professional cycling team. However, Orica Limited declared that in 2016 that they are leaving the co-sponsors spot by the end of the calendar year 2017. Orica Limited deals in commercial explosives used in mining, gas, oil and construction industries. It also engages in the supply of sodium cyanide for the extraction of gold. It specialises in ground support services related to mining and tunnelling works. The organisation has over (11,500) employees and (contractors), who give valuable service to customers across (100) countries. It has been enlisted in the “Australian Securities Exchange (ASX)”. Orica Limited has also suffered from fatal accidents in the recent years.
Orica Limited’s Business Fields and Products
Orica Limited is a member of (Dow Jones Sustainability Index), the Australian SAM Sustainability Index and the FTSE4Good Index. These indexes give a “benchmark” and are useful for examining the history of investments for sustainable organisations and funds. Orica Limited publishes a yearly sustainability report, which states the activity against major sustainability standards. In the year 2014 this organisation was recognised as the leader in “Natural Capital Decoupling”. This takes place when a company is able to grow financial without affecting the nature on a large scale.
Orica Limited functions in various types of markets and industries, which includes- (surface metal, surface coal, underground mining, underground construction, oil and gas, quarrying) and so on. This organisation functions in three business fields:
Blasting- The company is the largest supplier of commercial explosives to (mining, quarrying, and construction markets) and so on.
Product and services- (contracted services, initiators, boosters, bulk explosives, packaged explosives, data, reporting and analytics supplementary services, seismic systems).
The name of the brands for these “packaged explosives” are- (SentalTM, FortelTM, ApexTM, AmexTM, ImpactTM, SimexTM, PowergelTM and EurodynTM). (PowergelTM) was U.S. registered trademark for “Hercules Inc”in 1967, it is now it is owned by Orica Limited. “Minova” is a member of “Orica group” and its products and services involve the following items- (steel bolts and plates, glass-fibre reinforced polymer bolts, injectable chemicals and foams, mesh, resin capsules, cementitious grouts and coatings, pumps, soil anchoring systems, ballast bonding polymers, accessories and engineering services). It also supplies sodium cyanide for gold extracting and other products and services involve- (analysers, pro service, sparge, training) and so on. The ICI house now known as the Orica house was one of the tallest buildings in (East Melbourne), during the year 1950. This building was one of thevery first tall high-rise building in the city of Australia’s cities. It is one of the few post-war office buildings in recorded in the “Victoria Heritage Register”.
Standard costing is accounting method, which few of the manufacturers utilise in order to find out the contrast or changes between, the “actual costs” of the products which were manufactured and the costs which should have been incurred for these commodities. The cost which should have been incurred for the actual finished products could be termed as standard costs (Shakur et al. 2015). Standard costing would possibly be combined with the budget of a manufacturer for the purpose of profit planning and budget controlling. This is done for an “accounting year” and include the product costs, such as- (direct material, labor and manufacturing overhead) (Bargerstock and Shi 2016). Because of this method, the accounting done for “inventories” and the “cost of goods sold” associate the “standard costs”, which should have been utilised to make the actual finished product.
Orica Limited’s Sustainability Initiatives
If an organisation would incur more than the standard costs for (direct material, labor and manufacturing overhead) the business would fail to meet the projected earning level. Thus, it could be cited that the occurring changes would attract the attention of the management to the shortcomings related to production or greater input expenses. In order to rectify this the management could either fix the problems or charge higher for selling these goods (Brown, Stella and Simons 2018). After all, the external financial data requires to reflect the “historical cost principle”, the standard costs in the stockpile and the cost of goods sold would be required to be adjusted for the changes. After all, maximum of the manufactured products would have been sold, maximum of the changes would be reported to the operating statement as a part of the cost of goods sold (Dale and Plunkett 2017).
- A budget always comprises a standard costs, after all, it not possible to incorporate in it the very same actual cost of a product on the same day the budget has been finalised (Eisenberg 2016). As, the main implementation of budget is to compare it with the actual outcomes in the successive periods, the standards utilised within it keeps on reflecting in the financial reports through the budgeted period.
- If a company has a contract with its client, under which the client is required to pay the company its due charges and in addition to this a profit, which is termed as “cost-plus contract”. In this case the service providing company requires to utilise actual costs, as per the conditions mentioned in this contract (Rohde et al. 2018). In such a situation standard costing is invalid.
- If the it consumes too much time to get the total of actual costs into cost-pools for allotting the stockpile, then the accountant requires utilising a basic overhead application use rates and then adjusting them as per requirement in order to keep them near to the actual costs.
- It is a very simple task to print a report that points out the balances at the end of the accounting period in the inventory. If this is multiplied by the price of each product and just like that an ending inventory valuation could be generated (Farkas, Kersting and Stephens 2016). The outcome would not match with the actual cost of inventory. Furthermore, it would be necessary to amend the standard costs periodically, if the actual costs are frequently varying.
- The standard cost system assumes that the prices do not vary in the short run. In that way, the accountant could depend on these rates for the coming months or even for the full financial year, before they are required to update these costs. In such a situation where the life cycle of the products are very short and constant enhancements are driving down the prices, a standard cost could become obsolete within a couple of months.
- A number of changes that has been reported under the standard costing process would propel the management to undertake wrong decisions in order to generate favourable changes. Suppose, a company is buying raw materials in larger amounts in order to enhance the “purchase price variance”, although this raises the investment in the stockpile. Identical situation could occur, if the company engages itself in longer production period in order to enhance the “labor efficiency variance” (Ganorkar, Lakhe and Agrawal 2018). Although it is a better thing to generate smaller amounts of the finished products and opt for lesser labor efficiency in return.
Most of the companies prepare budgets, however, few of the manufacturing companies utilise standard costing for generating the costs of different commodities. So, it could be cited that standard costing would be able to help these companies in the future as well. The main feature of standard costing is that it provides a bar for the management, which would help them in comparing their actual performances against it so that they would be able to maintain as well as correct themselves even if they make any mistakes ((Kaplan et al. 2017).
Standard costing is a very useful tool, which would allow Orica Limited to be successful in their respective field of functioning. This tool would help Orica Limited in reaching their desired outcomes and would help them in planning the necessary course of actions in a step by step manner. Firstly, the planning occurs while building up the required strategies. After this process is over, the planning moves on to a much broader process of realisation of the desired outcomes by executing the steps appropriately formed when the strategy was prepared. Lastly, planning process would help Orica Limited in focusing upon financial parameters as well as, the constraints so that they would not cross their budget limit (Kabir 2017).
Orica Limited has a huge number of employees. These employees are required to function in a chain process so that the activities of the organisation would run smoothly and would not get interrupted (Wilmot et al. 2018). The employees of Orica Limited need to understand and share the plans of the company with all the employees, which requires a proper communication system among all of them. It is not always to understand the connection between strategic planning and daily corporate activities, when it comes to delivering goods and services to the customers. However, strategic planning formed with help of the standard costing allows these tasks to be completed without any hick ups.
Principles and Benefits of Standard Costing
Standard costing allows Orica Limited to form the necessary rules and regulation which are going to help them in functioning in a proper way. This process allows this organisation to set its core value the way it should be by allowing the management to focus on- employment, compensations, promotions, quality, services and so on (Kerfai, Bejar Ghadhab and Malouche 2016). Orica Limited follows standard costing method and this tool helps them in producing the finished products by maintaining its quality by incurring lesser input costs. This company is a public company and the standard costing process allows them to pay the dividends to its shareholders in a feasible manner.
Standard costing would allow Orica Limited to eliminate any deviations from its pre-planned strategies if anything not goes according to the plan, because this accounting tool would help the management to bring budget under their control. Alongside the management of Orica Limited the accountant of this organisation is also a very important individual as the recovery from an unwanted situation would depend on the skill set of this employee and how they would utilise standard costing tool (Mahal, and Hossain 2015). Along with these facts the internal control of the organisation and evaluation of the financial reports regarding its authenticity by the CEO’s and CFO’s of Orica Limited is now becoming a trend in the multinational companies.
These reports would help Orica Limited to control its budget as well as internal corporate environment and would help the executives to paying more attention to their respective duties within the company. In most of the multinational corporations there is a position given to a trustworthy individual whose responsibility is to maintain control over management accounting process such as- budgetary control and this person is helped by other personnel’s (Mertens and Meyer 2018). The primary tool utilised by them is standard costing which would allow them to control every phase of cost related matters as well as it would help them in controlling other tasks which are necessary for Orica Limited.
On the other hand, the responsibilities which are to be carried out by the “Chief Financial Officer” (CFO) of Orica Limited is generally- “external reporting”, “treasury functions”, “general cash flow” and “managing the financing activities” (Parker, and Boyns, 2018). In Orica Limited if the same person is carrying out a dual role as the CFO and the controller or comptroller, standard costing would help them in organising and carrying out these responsibilities appropriately without any mistakes (Brennan et al. 2016). In Orica Limited if there would be an internal audit group assigned with the responsibility of supervising the treasury and the accounting departments, following the process of standard costing for proper running of both units would very essential.
Standard Costing and its Application at Orica Limited
Standard costing helps the management in making authentic forecasts and also gives the structure for evaluating business performance. The suitability of this accounting tool for Orica Limited is depicted below:
- The process of standard costing acts as the guiding medium for the management in developing “price and production policies” (Shi 2016). Suppose, it would be able to help the management in the area of “inventory pricing”, “product pricing”, “profit planning” and so on.
- This process would give Orica Limited a stable and feasible tool for comparing the “actual costs” and “standard costs” based on various elements of costs individually (Shigaev 2015). It also points out areas where correction is required and how far the enhancement would be needed by the company in the long run.
- Standard costing would help the employees and the management of Orica Limited in staying aware of any unnecessary expenditure in the company (Steyn 2017). This tool of accounting also helps in making the decision of who deserves incentives and other rewards in the company starting from workers as well as, top-level employees by judging their efficiency.
- The process of standard costing helps in developing more compressed, suitable and impactful budget for Orica Limited (Taber 2015).
- This process helps the management of Orica Limited in deciding which employee is best suited for which responsibility and also helps in maintaining the functionality of various departments of this organisation (Swanson et al. 2016).
- Standard costing allows the management of Orica Limited by helping them follow the golden principle of “management by exception” very easily and more impact-fully (Wegmann 2018).
- This tool of accounting helps Orica Limited by allowing them to utilise their employees, machinery and resources more efficiently (White, Anitsal and Meral Anitsal 2015) and experience the advantages of being economic soundness, efficacy and better productivity.
- Standard costing system makes the budget controlling more impactful for Orica Limited (Wilson and Wolak 2016). This costing technique follows a systematic step by step manner of functioning, which also makes planning and controls an effective and simple process for the management.
Conclusion:
It could be concluded from the above discussion that, standard costing helps the management in making authentic forecasts and also gives the structure for evaluating business performance. The process of standard costing acts as the guiding medium for the management in developing “price and production policies” . This process would give Orica Limited a stable and feasible tool for comparing the “actual costs” and “standard costs” based on various elements of costs individually. It also points out areas where correction is required and how far the enhancement would be needed by the company in the long run. Standard costing would help the employees and the management of Orica Limited in staying aware of any unnecessary expenditures in the company. This tool of accounting also helps in making the decision of who deserves incentives and other rewards in the company starting from workers as well as, top-level employees by judging their efficiency. The process of standard costing helps in developing more compressed, suitable and impactful budget for Orica Limited. This process helps the management of Orica Limited in deciding which employee is best suited for which responsibility and also helps in maintaining the functionality of various departments of this organisation.
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