Q. 2. What are the advantages of standard costing ? Discuss its limitations.

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021



1. Measurement of efficiency. Standard costs are compared with actual costs when actual costs are equal or less than standard costs, it may be said that working of the organization is done efficiently and satisfactorily. In case, standard costs are less than actual costs, it will indicate some inefficiency. Thus it helps the management to know whether work is done efficiently or not.
2. Deterrnination of responsibilities of various employees. Standards are determined separately for various activities and sub-activities, which help the management whether concern employees are working with expected efficiency or not. If some activity is showing unfavorable variance, the related employee may be held responsible for that loss. He may not avoid or shift his responsibility due to clear cut information of unfavorable variance.
3. Helpful in determination of Prices of Production. Most of the time, prices of production are quoted and advertised by the producers in the market, even before production is completed. Under this situation, prices are determined on the basis of standard costing analysis because by that time producer does not know his actual cost of production.
4. Standardisation of activities. Due to standard costing standards are fixed for various activities. It helps the employees to work efficiently.
5. Helpful in managerial activities. This helps the management in managerial activities. Management may exercise effective control on production activities and may take important decisions properly regarding various elements of cost, such as purchase of material, use of material, appointment of workers, wages of workers etc.
6. Possibility of improvement of quality of production. Under standard costing emphasis is not given only on cost-effectiveness but it is also taken care of that goods are produced of standard quality. Proper emphasis is given in it to improve the quality of production.
7. Possibilities of minimizing prices of production. By using standard costing method, prices of production are minimized, which help in increasing the volume of sales resulting that total profits of the organization will be increased. Prices are minimized by using this method because under this method proper care is taken to all possible wastages and inefficiencies.
8. Easy in Accounting. The use of standard costing method, accounting process becomes easy, because standards are determined for every transaction well in advance and compared to actual costs.
9. Quality improvement. Standard cost tries to check all wastages and promote efficiency which further results in quality improvement and price reduction.
10. Cost reduction. Standard costing facilitates the estimating of the costs of new products with a greater degree of accuracy.
11. Comparison. Standard costing technique is very useful for comparison of standard cost to actual costs and thus it is known where is the waste and how to control it.
12. Economy. This technique is very economical and needs lesser attention of management and executives.

Limitations of Standard Costing

Although standard costing is very useful technique for the management , but it has certain limitations and shortcomings. Therefore, while using standard costing, management should keep in mind its limitations. Following are the important limitations of standard costing.
1. Difficulty in determination of standards. The most important limitation of standard costing is the difficulty faced to determine standards for different activities. For this purpose, management has to take great care, should study the movement and past information and data, should take help of the expens of various matters. standards are not determined correctly, entire further analysis, interpretations and decisions will lead to confusion, conflicts and losses.
2. More expensive method. For the purpose of determination of standards, constant research of various aspects of production is conducted, past information is collected and analyzed, opinion of experts and technicians is taken. All these activities need heavy expenditure. Therefore, it increases considerable amount of expenditures of the organisation.
3. Need of revised Standards. Management should not feel free after determination of standards once. These standards are needed to be revised from time to time, because due to change in technology, marketing conditions, consumers habits, needs and tests, previously determined standards become out of date. Therefore, standards revision should be made from time to time, whenever, it is needed.
4. Not suitable for all producers. Standard costing is not suitable for all the industries. It is suitable only for those production where production is done of uniform and of standard quality. Because only in such production standardisation of activities is possible. But where every unit of production is different in nature
and quality, this method may not be used suitably, because in such cases standardisation of various elements of cost is not possible.
5. Depends upon budgetry costing. The standard costing can be used when budgetary techniques are in use.
6. Needs experts. While deciding standard the services of specialists and experts are needed thus, it can be used by such organisations where such experts are employed.

Leave a Comment