Benefits and Limitations of Standard Costing System.

What is the Benefits of Standard Costing Systems or Method?

It is traditionally used system, it requires lesser resources and easy to implement.

It saves the bookkeeping cost by not requiring to record actual cost each time when transaction occurs, In standard costing all the standard cost recording are done when actual activity level (sales volume) are known to determine the total standard cost for the period.

It helps to identify the relationship between different variables like price and usage. Ex, usage of poor quality raw material to reduce price may lead to increased usage of raw material due to increase in wastage.

Actions can be taken on basis of materiality (benefit exceeds cost). It directs managerial attention towards the area which really needs improvements. Like adverse labour efficiency variance suggests the need of training.

What is the Limitations of Standard Costing Systems or Method?

When the variance is reported nothing can be done to prevent the loss. It is based on historical data by the time variances are reported may be too late from the period to which it relates, and can be considered out of date by manager being reported.

Manager may not understand the purpose of standard costing and perceive it as a limitation on their authority to take decisions. To control cost Manager may be feel forced to take decision against their beliefs, like Quality is important for business success or it is unethical to use poor quality materials.

A person responsible for variances is difficult to identify for reward or penalizing. Ex. Favourable usage variance might because of the good quality material than standard lead to reduced wastages.

It does not give any motivation to improve their performance beyond the standards. Ex, sales person has already achieved his/her target to be entitled for bonus than he/she may not do further effort to increase sales.

It directs resources towards past while business objective is achieved by looking into future.

Other limitations are:

It does not consider impact on customer, how product prices are justified and product quality.

It does not consider liquidity and long term impact (goods may be sold on credit) of the standards set to achieve short term results.

Thank you. Your comments are invaluable for me.

If you liked this post, kindly tell to your friends or peers.