Ans. Advantages of Standard Costing
The
introduction of Standard Costing system may offer many advantages. It varies
from one business to another. The following advantages may be derived from
standard costing in the light of the various objectives of the system:
1. To measure
efficiency :
Standard Costs provide a yardstick against which actual costs can be measured.
The comparison of actual costs with the standard cost enables the management to
evaluate the performance of various cost centres. In the absence of standard
costing, efficiency is measured by comparing actual costs of different periods
which is very difficult to measure because the conditions prevailing in both
the periods may differ.
2. To fix prices
and formulate policies : Standard costing is helpful in determining prices
and formulating production policies. The standards are set by studying all the
existing conditions. It also helps to find out the prices of various products.
It helps the management in the formulation of production and price policies in
advance and also in the areas of profit planning product pricing, quoting
prices of tenders. It also helps to furnish cost estimates while planning
production of new products.
3. For Effective
cost control :
One of the most advantages of standard costing is that it helps in cost
control. By comparing actual costs with the standard costs, variances are
determined. These variances facilitate management to locate inefficiencies and
to take remedial action against those inefficiencies at the earliest.
4. Management by
exception :
Management by exception means that each individual is fixed targets and every
one is expected to achieve these given targets. Management need not supervise
each and everything and need not bother if everything is going as per the
targets. Management interferes only when there is deviation. Variances beyond a
predetermined limit may be considered by the management for corrective action.
The standard costing enables the management in determining responsibilities and
facilitates the principle of management by exception.
5. Valuation of
stocks : Under
standard costing, stock is valued at standard cost and any difference between
standard cost and actual cost is transferred to variance account. Therefore, it
simplifies valuation of stock and reduces lot of clerical work to the minimum
level.
6. Cost consciousness : The emphasis
under standard costing is more on cost variations which makes the entire
organisation cost conscious. It makes the employees to recognise the importance
of efficient operations so that efforts will be taken to reduce the costs to
the minimum by collective efforts.
7. Provides
incentives :
Under standard costing system, men, material and machines can be used
effectively and economies can be effected in addition to enhanced productivity.
Schemes may be formulated to reward those who achieve targets. It increases
efficiency, productivity and morale of the employees.
Limitations
of Standard Costing
In
spite of the above advantages, standard costing suffers from the following
disadvantages:
1. Difficulty in
setting standards : Setting
standards is a very difficult task as it requires a lot of scientific analysis
such as time study, motion study etc. When standards are set at high it may
create frustration in the minds of workers. Therefore, setting of a correct
standards is very difficult.
2. Not suitable
to small business :
The system of standard costing is not suitable to small business as it requires
lot of scientific study which involves cost. Therefore, Small firms may find it
very difficult to operate the system.
3. Not suitable
to all industries :
The standard costing is not suitable to those industries which produces
non-standardised products and also not suitable to job or contract costing.
Similarly, the application of standard costing is very difficult to those
industries where production process takes place more than one accounting
period.
4. Difficult to
fix responsibility:
Fixing responsibility is not an easy task. Variances are to be classified into
controllable and uncontrollable variances because responsibility can be fixed
only in the case of controllable variances. It is difficult to classify
controllable and uncontrollable variances for the variance controllable at one
situation may become uncontrollable at another time. Therefore, fixing
responsibility is very difficult under standard costing.
5. Technological
changes :
Standard costing may not be suitable to those industries which are subject to
frequent technological changes. When there is a change in the technology,
production process will require a revision of standard. Frequent revision of
standards is a costly affair and therefore, the system is not suitable for
industries where methods and techniques of production are subject to fast
changes.
In
spite of the above limitations, standard costing is a very useful technique in
cost control and performance evaluation. It is very useful tool to the
industries producing standardised products which are repetitive in nature.
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