Advantages And Disadvantages Of Standard Costing Pdf

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Objectives, Advantages & Disadvantages of Standard Costing, Cost Management B Com Notes | EduRev

Standard costing compares the standard costs and revenues with the actual results of the process, finds the reasons for the variances, provides information about deviations to management for taking steps to improve it. A standard costing system initially records the cost of production at standard. Units of inventory flow through the inventory accounts from work-in-process to finished goods to cost of goods sold at their per-unit standard cost. When actual costs become known, adjusting entries are made that restate each account balance from standard to actual or to approximate such a restatement. A standard is a benchmark for measuring performance.

In accounting , a standard costing system is a tool for planning budgets , managing and controlling costs , and evaluating cost management performance. A standard costing system involves estimating the required costs of a production process. But before the start of the accounting period, determine the standards and set regarding the amount and cost of direct materials required for the production process and the amount and pay rate of direct labor required for the production process. In addition, these standards are used to plan a budget for the production process. At the end of the accounting period, use the actual amounts and costs of direct material. Then utilize the actual amounts and pay rates of direct labor to compare it to the previously set standards.

Standard Costing System

In a standard costing system, standards are normally categorized as ideal standards and practical standards. The difference between these two types of standards is briefly explained below:. The achievement of such standards requires highly skilled and motivated workers and the best possible use of production facilities. In short, we can say that the ideal standards can only be achieved under the best and perfect work circumstances. The use of ideal standards is not common among companies because they are based on highly strict assumptions that do not allow even the normal inefficiencies.

Five of the benefits that result from a business using a standard cost system are:. Improved cost control Companies can gain greater cost control by setting standards for each type of cost incurred and then highlighting exceptions or variances—instances where things did not go as planned. Variances provide a starting point for judging the effectiveness of managers in controlling the costs for which they are held responsible. Now the firm can investigate the cause of the excess of actual costs over standard costs and take action. Further investigation should reveal whether the exception or variance was caused by the inefficient use of materials or resulted from higher prices due to inflation or inefficient purchasing.

According to the Chartered Institute of Management Accountants. The definition given by W. Biggs makes concept of standard costing more clear. Standard costing acts as a valuable guide to management in the formulation of price and production policies. It helps management in the field of stock pricing, product pricing, profit-planning and etc.


1. Standards set provide yardsticks against which actual costs are compared to ascertain efficiency or inefficiency of actual performance. Thus, standard costing​.


5 Limitations of Standard Costing & Variance Analysis

Objectives of Standard Costing:. To measure different operational efficiencies and check the wastages. To improve the delegation of authority and generate a sense of responsibility among the employees.

Cost control is a basic objective of cost accountancy. Standard costing is the most powerful system ever invented for cost control. Historical costing or actual costing is nothing but, a record of what happened in the past. The actual costs lose their relevance after that particular accounting period.

Standard Costing: Definition, Advantages, Disadvantages

Standard costing is an eminent way of keeping the business costs on track. It is the process of estimating future costs and expenses and comparing them to the actual data in order to analyze how the differences can be manipulated or altered for the betterment of the company. Several budgets are prepared by all the departments of a company. All these small budgets are then put together to form a master budget or financial plan. The company maintains its costs and revenue as per the budget in order to maintain maximum profitability. The difference between the two is referred to as a variance.

The followings are the limitations, drawbacks, setbacks of the Standard Costing Technique. More Expenses : The standard is fixed for raw materials in terms of price and quantity, and then standard is fixed for labour in terms of rate and number of workers with level of efficiency. Moreover, standard is fixed for fixed overhead and variable overhead. Hence, there is a need of incurring heavy expenses for fixing above mentioned standards since the fixing of standard requires high order of skill i. Frequent Revision of Standard : Future is uncertainty and the business environment is fast changing. Hence, the fixing of standard requires the revision at frequent intervals.


Standard Costing - Meaning, Advantages and Disadvantages · Standard Costing: · Definitios: · Standard: According to Prof. · Standard Cost: Standard cost is.


Accounting for Management

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4 Comments

  1. Rosinda Z. 14.05.2021 at 05:19

    A standard costing system is a common way to budget for planned projects, managing costs in a production run and evaluating those costs after the production has finished.

  2. Bellalabella 16.05.2021 at 07:39

    Advantages and disadvantages of using standard costs. Improved cost control. More useful information for managerial planning and decision making. More reasonable and easier inventory measurements. Cost savings in record-keeping. Possible reductions in production costs.

  3. Madelene B. 16.05.2021 at 21:10

    The research and study of the method standard costing, its advantages and disadvantages have been worked out by such scientists: H. Harrison, T. Downey, G. Emerson, V. E. Kerimov, R. S. Accounting/ctarchery.org?sfvrsn=0.

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