Page 163 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 13. Standard costing increases clerical work since standard rates are fixed for material pricing,
overhead allocation apportionment, etc.

8.5 Limitations of Standard Costing

Standard costing has certain limitations. These are the following:
1. Establishment of standard costs is difficult in practice. Even if the particular type of standard
to be used has been properly defined, there is no guarantee that the standard established
will have the same tightness or looseness as envisaged throughout the organisation.
2. In course of time, the standards become rigid, it is not always possible to change standards
to keep pace with frequent changes in the manufacturing conditions. Frequent revision of
standards is costly and creates problems.
3. Standard costing is an expensive technique for a small concern.

4. It is difficult to set accurate standard costs. Improperly set standards may do more harm
than good.
5. It is not easy to distinguish variances as controllable or uncontrollable.
6. Since business conditions are changing, the standards are to be revised frequently. Revision
of standards is a tedious and costly process.
7. Standard costing cannot be applied fully to job order industries dealing in non-standardised
products. It may be applied partially but it would not be effective.
8. If standards are too high or rigid, they will be unattainable. It will adversely affect the
morale and motivation of employees and lead to resistance.
9. Inaccurate, unreliable and out-of-date standards do more harm than any good.

Self Assessment

State whether the following statements are true or false
14. Standard costing is an effective technique for a small concern.
15. It is easy to distinguish variances as controllable or uncontrollable.

8.6 Determination of Standard Cost

As ‘standard’ is a relative expression; one has to determine for oneself what one deems
appropriate as a ‘standard’. However, one should not lose sight of the objective, which normally
should be avoidance of all losses and wastages as far as possible. The management may certainly
fix standards on the basis of maximum possible efficiency, possibly with an assumption of no
wastage, no idle time, etc. However, this is not realistic; the standard will be the ‘Ideal Standard’
but impracticable-no one will even make an attempt to achieve it.
Alternatively, an average of past few years’ costs could be taken as basis but this will mean
perpetuating past inefficiencies, by making them the target. This will defeat the very purpose of
standard costing.
A target should be such that it will induce the worker to give out his best. In order to make people
believe in standards and to induce them towards achieving them, standards should better be
such as can be achieved but with an effort; in other words, they should be somewhat idealistic.

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