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Benefits of Standard Costing
Benefits of Standard Costing
Benefits of Standard Costing
The following are the main benefits obtained by use of standard costing system:
Measurement of Efficiency
Quick Reporting
Benefits of
Standard Elimination of Weaknesses of Historical Costing
Costing
Improvement in Efficiency
Eliminates Waste
Management by Exception
With the help of the system of standard costing the management can perform managerial functions
effectively. It helps management in performing the following functions:
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.
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.
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.
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.
k) Eliminates Wastes
l) Management by exception
Limitations
of Standard Difficult to revise
Costing
Difficult to decide realistic standards
Costly
Small organisations find it difficult to adopt standard costing owing to financial limitations.
Establishment of standard cost requires higher degree of technical skill, which is expensive.
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.
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.
Accurate standards do help the management. But the standards should be very realistic and close to
the actual.
Implementation of standard costing system requires a lot of interest on the part of management
and complete support and co-operation.
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.
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.