Advantages and Disadvantages of Standard Costing


Meaning of Standard Costing

According to the Chartered Institute of Management Accountants. Standard Costing is “the preparation and use of standards costs, their comparison with actual costs and the analysis of the variances to their causes and points of incidents”. The definition given by W.W. Biggs makes concept of standard costing more clear. According to him, “Standard Costing discloses the costs of deviations from standard and classifies these as to their causes, so that management is immediately informed of the sphere of operations in which remedial action is necessary.’

Advantages of Standard Costing

Formulation of price and production policies

Standard costing acts as a valuable guide to management in the formulation of price and production policies. It helps management in the field of stock pricing, product pricing, profit-planning and etc.

Comparison and analysis of data

Standard costing provides a stable and sound basis for comparison of actual costs with standard costs according to different elements separately, It brings out clearly the impact of external factors and internal causes performance of the concern. Thus, it indicates places where remedial action in necessary and how far improvement is possible in the long on the cost and run.

Cost consciousness

An atmosphere of cost consciousness is created among the staff, managerial as well as workmen, of the business. Standard costing also provides incentives to workers and middle and top executive personnel for efficient work.

Delegation of authority and fixation of responsibility

The net profit is analysed and responsibility can be placed on the person in charge, for any variations from the standards. The sphere of operation of adverse variations is disclosed and particular production department or centre can be held accountable for it. Thus, delegation of authority and fixation of responsibility can be done by management to control the affairs in different departments.

Management by ‘exception’

The principle “management by exception” can be made applicable in the business. This helps the management in concentrating its attention on cases which are off standard i,e below or above the standard set in. The trend of costs is portrayed and therefore, a pattern is provided for the elimination of undesirable factors causing damage to the business. 

Limitations of Standard Costing

  • Fixation of standards may be costly and require high order of skill and competency. Small concerns, therefore, feel difficulty in the operation of such system.
  • The industries which deal with non-standardized products and the jobs, which change according to customer’s specifications, there may find the system of standard costing unsuitable and costly.
  • Responsibility can be delegated upon a particular person, process or production only when the controllable and uncontrollable factors are distinctly known–and this is a very hard nut to crack.