Benefits of Standard Costing
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Transcript of Benefits of Standard Costing
Benefits of Standard Costing:
The following are the main benefits obtained by use of standard costing system:
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.
Valuable aid to Management
Measurement of Efficiency
Formulation of Production and Pricing Policies
Quick Reporting
Less Cost of Operation
Elimination of Weaknesses of Historical Costing
Improvement in Efficiency
Inventory Valuation Simplified
Promotes Cost Consciousness
Facilitates delegation of authority
Eliminates Waste
Management by Exception
Benefits of Standard Costing
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
Difficult to revise
Difficult to decide realistic standards
Requires support of Management
Higher standards are harmful
Costly
Post mortem analysis
Limitations of Standard Costing
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.