Page 219 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes (iv) Stock can be valued at standard cost and this will in turn reduce fluctuation of profits due
to adoption of different methods for stock valuation,
(v) It facilitates timely cost reports to management and a forward looking mentality is
encouraged at all levels of the management. It is a basis for the implementation of an
incentive system or method for the employees,

(vi) It helps to exercise control over the costs as the variances can regularly be ascertained and
corrective measures can be initiated at the right time,
(vii) It helps to promote the labour efficiency and productivity,

(viii) Management by exception is possible, since it is possible to separate the efficient from in
efficient operations,
(ix) Standard costing is of immense benefit for cost audit since if variances are satisfactorily
explained, the accuracy of costing can be safety assumed,
(x) Standard costing provides faster reporting of operating data. It is most important due to
the fact that the value of any information declines as it relates to a period farther and
farther in the past,
(xi) Standard costing provides a common denominator for comparison between one period to
another,
(xii) Standard costing provides a stable product cost per unit. The actual cost of a product may
vary from period to period due to much reason. It cannot be used as a basis of price
fixation of a product,
(xiii) Standard costing helps in business or organisation planning, budgeting and marginal
costing. It is very useful in planning and budgeting,
(xiv) Standard costing simplifies the cost control procedure as the figures for control purposes
are easily and directly obtained. Thus, there is saving in the accounting computation,
(xv) It facilitates to reduce clerical and accounting cost and managerial time,
(xvi) It reduces avoidable wastages and losses, and
(xvii) Standard costing highlights areas of strengths and weakness.

12.2.2 Disadvantages or Limitations of Standard Costing

As every coin has two sides, standard costing is not bereft of disadvantages. The following are
its limitations:
(i) Ascertainment of standards requires high degree of technical skill and is, therefore, costly.
That is why, small business organisations may find it difficult to establish standard costing
owing to their limited financial resources,

(ii) Standard costing is applied for planning and controlling manufacturing costs. Thus, it
cannot be applied in a service organisation or industry,
(iii) The managerial executives can only be held responsible for variances if such variances
arise from actions which can be controlled by them. This means that for fixing
responsibilities. The controllable and non-controllable portions of the variances should
be separated. But the segregation of variances into controllable and non-controllable
portions may often become a difficult task,

(iv) Another disadvantage or limitation relates to the reliability of the standard set—both
from the difficulty of establishing the standard and subsequently maintaining its accuracy,

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