Benefits of Standard Costing:

The following are the main benefits obtained by use of standard costing system:

Valuable aid to Management

Measurement of Efficiency

Formulation of Production and Pricing Policies

Quick Reporting

Less Cost of Operation

Benefits of
Standard Elimination of Weaknesses of Historical Costing
Costing
Improvement in Efficiency

Inventory Valuation Simplified

Promotes Cost Consciousness

Facilitates delegation of authority

Eliminates Waste

Management by Exception

a) Valuable Aid to Management

With the help of the system of standard costing the management can perform managerial functions
effectively. It helps management in performing the following functions:

i) Planning: It helps the management to plan effectively as determination of standard cost

involves careful analysis of different activities of the business.
ii) Organising: Standards decide the responsibility of executives. Therefore, an organisation
chart can be drawn properly for locating responsibility of executives.
iii) Co-ordinating: Through the working of the standard costing system, coordination is
achieved, while establishing standard cost, various activities of the business operations are
to be considered and worked in cohesion.
iv) Motivating: Standard works as a target, to attain these target people put in best efforts.
v) Controlling: The system of standard costing involves comparison of actual cost with the
standard cost which is the essence of controlling. Management can evaluate performance
and determine efficiency or inefficiency and take corrective action, where and when
necessary.

b) Measurement of Efficiency

Standard cost works as an yardstick against which the actual performance can be measured. This
makes possible the application of the principle of exception. This draws the attention of the
management where corrective steps are to be taken.

c) Formulation of Production and Price Policies

Standard cost helps management in formulation of production and price policies. Management can
plan in advance production including new products. Standard cost helps to estimate the total cost of
a product and fix its selling price in advance.

d) Quick Reporting

The system of standard costing facilitates quick reporting of operating data which the management
can use for taking decisions.

e) Less Cost of Operations

Though there is a large volume of work involved in establishment of standard costing, the operation
of standard costing works out cheaper in the long run. Cost of installation may be high but the cost
of subsequent operations will be less.

f) Elimination of Weaknesses of Historical Costing

The limitations of historical costing are eliminated by adoption of standard costing.

g) Improvement in Efficiency

Setting up of standard cost requires detailed analysis of all the operations. This helps to improve
efficiency, bringing out improvement in production and other operation methods.

h) Inventory Valuation

The system of standard costing simplifies the valuation of inventories. The inventory is valued at
standard cost and the difference between the standard cost and actual cost is transferred to a
variance account.
 i) Promotes Cost Consciousness

Due to emphasis on cost variation, the entire organization becomes cost conscious. Employees in
production and other departments realize the importance of efficient operations which leads to cost
reduction.

j) Facilitates delegation of authority

As responsibility is defined clearly, delegation of authority is made more effective.

k) Eliminates Wastes

Fixation of standards helps to eliminate waste of material, idle time etc.

l) Management by exception

Management takes decisions on the basis of variances reported.

DISADVANTAGES OF STANDARD COSTING

Standard costing has the following limitations or disadvantages:

Unsuitable to small organisations

Requires higher degree of technical skill

Difficult to fix up responsibility

Limitations of
Standard Difficult to revise
Costing
Difficult to decide realistic standards

Requires support of Management

Higher standards are harmful

Costly

Post mortem analysis

a) Not Suitable to Small Organisations:

Small organisations find it difficult to adopt standard costing owing to financial limitations.

b) Requires higher degree of technical skill:

Establishment of standard cost requires higher degree of technical skill, which is expensive.

c) Difficult to fix up responsibility:

Executives may be held responsible if the unfavorable variances are caused due to the factors within
their control. It becomes, therefore, necessary to classify the factors between controllable and non-
controllable which is a difficult task.

d) Revision of Standards is difficult:

The system of standard costing becomes ineffective in those industries which are subject to
frequent changes. If the system of standard costing is adopted in such industries, the standards are
to be revised frequently and revising of standard costs is difficult and frequent revisions are not
possible.

e) Difficult to decide realistic standards:

Accurate standards do help the management. But the standards should be very realistic and close to
the actual.

f) Requires support of management:

Implementation of standard costing system requires a lot of interest on the part of management
and complete support and co-operation.

g) Higher standards are harmful:

High standards may kill the morale of the employees. Inspite of the above limitations, standard
costing can prove to be a boom to the management, if used carefully and cautiously.

h) Costly:

The maintenance of the cost data base is very expensive. Hence, this technique is not suitable to
small organisations.

i) Post mortem analysis:

Variance analysis is a post mortem on past events. The past cannot be altered. It can simply guide if
the similar circumstances arise in future.