Advantages And Disadvantages Of Standard Costing | What is Standard Costing?, Meaning, Objectives

Standard Costing Advantages and Disadvantages: Standard costing is a system of accounting for the purpose of equitably allocating the cost of production. Standard costing is often used by companies in various industries from manufacturing, construction and engineering, to distribution and retail.

A company that uses standard costing is expected to have better control over its expenses. This kind of calculation helps companies assign normal values to all materials and services used in production, so they can know how much should be charged for their use. That knowledge allows a company to calculate the cost it needs to charge for its products, based on their real value or cost. When a company uses standard costing, it will gather these costs into one place so they can be tracked. This way, the company knows exactly how much each item costs and how much profit it made from selling its products/services to customers in a given period.

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Advantages of Standard Costing

Standard costing has many advantages. A few of the most beneficial ones are as follows:

  • Efficiency – One of the main advantages of using standard costing is that it can help businesses be more efficient. This is because it can help businesses find ways to use their resources more effectively. By understanding how much each item costs, businesses can make better decisions about where to spend their money. This can save them a lot of money in the long run. Moreover, accurate reports are very beneficial, but they are not timely, hence, standard costing is a suitable alternative.
  • Allows for cost control –  It helps to allocate resources in a responsible way, and it helps to identify where the costs are being incurred. This information can then be used to improve the efficiency of the business. In addition, standard costing helps to track the financial progress of projects over time.
  • Helps management make decisions – Standard costing is a management tool that can help make decisions about which projects to invest in and which ones to cancel. By taking into account the costs of each project, managers can make more informed decisions about which projects will be profitable and which ones will not. This helps them avoid wasting money on projects that won’t turn out as expected and allows them to focus their resources on more profitable endeavours.
  • Relatively accurate budgets – When creating a budget, it is important to use a standard costing method. This will help to ensure that the budgets are relatively accurate and consistent throughout the organisation. A standard costing method takes into account all of the costs associated with a product or service. This can include direct costs, such as materials and labour, as well as indirect costs, such as overhead and depreciation. By using a standard costing method, you can create accurate budgets that will be useful throughout the organisation.
  • Lower production costs – One of the main advantages of standard costing is that it can lower production costs. This is because it allows for a more accurate definition of the cost of each product or service. It can also help to track and control costs. Additionally, standard costing can help to identify and eliminate waste in the production process.

Disadvantages of Standard Costing

As we have already seen, standard costing has some considerable advantages. However, this method also has its downsides such as:

  • Not Accurate – The main disadvantage of standard costing is that it can be difficult to determine which costs are important and which are not. This can lead to inaccurate estimates and bloated budgets, as well as unnecessary delays in making decisions about which projects to pursue.
  • Difficult to compare – Another disadvantage of standard costing is that it can be difficult to compare the costs of different projects. This can lead to wastefulness and inefficiency in business decisions, as well as lawsuits if inaccurate estimates are used in contract negotiations.
  • Slow feedback – While standard costing is a great way to track progress and performance, it can be slow to provide feedback. This can make it difficult to make necessary changes or adjustments. As a result, standard costing can create frustration and wasted time. Additionally, standard costing can be inaccurate and lead to costly mistakes.
  • Low morale – One of the many disadvantages of standard costing is that it can lead to low morale among employees. Employees may feel like they are not valued or appreciated, and they may stop wanting to work because they may not be appreciated for their efforts by the managers. Instead, managers may spend more time resolving variances rather than providing positive reinforcement.
  • Unfavourable variance reports might cause problems – When a company starts using standard costing, it is important to be prepared for the consequences. Employee backlash is one of the biggest risks associated with standard costing. Due to the nature of standard costing, employees may hide  unfavourable variance reports and prevent managers from making the necessary changes to improve performance.

Despite these disadvantages, standard costing is still a popular method for managing business expenses. It’s useful for tracking the progress and costs of projects, and it can help businesses make better decisions about which projects to pursue.

Comparison Table for Advantages and Disadvantages of Standard Costing

Following are the advantages and disadvantages of Standard Costing:

Efficient for businessesNot very accurate
Ability to control costDifficulty comparing costs
Helps management with decision makingFeedback is slow
Budgets are relatively accurateCan cause low morale among employees
Production costs are loweredUnfavourable variance have potential to exacerbate issues with respect to low morale

Advantages And Disadvantages Of Standard Costing 1

Conclusion on Standard Costing – Advantages And Disadvantages

In this article, we have looked at the advantages and disadvantages of standard costing. Standard costing is a process that can help you to better manage your business by providing you with a better understanding of how your costs are related to each other. However, it can be difficult to get started with standard costing, and there are some disadvantages associated with it. Overall, standard costing is an important tool for businesses that want to improve their efficiency and profitability.

FAQs on Advantages And Disadvantages of Standard Costing

Question 1.
What is Standard Costing?

Standard costing is a method of pricing products that uses a set of predetermined costs to create a budget for the company. Developing a budget using standard costing allows businesses to make accurate predictions about their future expenses and ensures that they are spending their money in the most effective way possible. Additionally, standard costing can help companies identify undervalued assets and provide more accurate forecasts for future growth.

Question 2.
Why is Standard Costing important?

Standard costing is important because it allows businesses to compare the cost of different projects. By calculating the costs of each element of a project, businesses can make accurate decisions about which projects to pursue and how much money they need to invest. This information can also be used to set budgets and determine whether a project is profitable.

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