The advantages and disadvantages of standard costing
The benefits for controlling having a standard costing system in operation can be summed up as follows;
- Cautiously planned standards are a help to more precise budgeting.
- Standard costs give a yardstick against that real costs can be measured.
- The setting of standards includes determining the best materials and techniques which might lead to economies.
- A target of effectiveness is set for employees to arrive at and cost-consciousness is stimulated.
- Variances can be computed that enable the principle of management by exception to be operated. Only the variances that exceed acceptable tolerance limits require to be investigated by management with a vision to control action.
The disadvantages of standard costing include the following:
- It is difficult to set accurate standards.
- The collection and analysis of data to run a standard costing system may be very time-consuming.
- Standards may be seen as a pressure device.