Pros And Disadvantages Of Standard Costing
STANDARD COSTING
Standard costing is a cost accounting measurement basis that predicts unit costs and production quantities based on predetermined standards before the production even begins and as such it is an alternative method to historical cost accounting.
It is suitable for production, which is standardized and mass or repetitive.
Standard costing serves as an important input for the budget and can be used within all costing methods (full costing method, variable costing method, throughput costing etc.).
Basic steps in standard costing:
• Select a standard (see below)
• Estimate standard unit costs and production quantity
• Ascertain actual unit costs and production quantity
• Variance analyses, during which standard costs are compared
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ADVANTAGES OF STANDARD COSTING
• Facilitates planning and cost control
• If standard costing system is linked with staff evaluation, it can enhance employee motivation (however, if reasonable standards are used)
DISADVANTAGES OF STANDARD COSTING
• Implementation of standard costing and its maintenance may be time consuming and expensive
• There are number of cases, when standard costing does not make much sense:
o In industries with rapid changes – standards become easily out-of-date as well as the information obtained by variance analyses.
o The production process is highly automatized and inefficiencies are thus not so frequent. In this case, there are not many possibilities to influence labor costs (this is where standard costing is most useful).
o Manufactured products are not at least a little standardized.
o Cost-plus contracts, where customers are committed to pay the costs incurred plus agreed profit margin. As the result, actual costs must be used in this case. Although the customer pays all the costs, lower costs (achieved by their effective management e.g. by using standard costing) means a lower price for the customer and as such more competitiveness for the
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