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Accounting for Managers
Notes 12. It creates an atmosphere of cost consciousness among executives, foremen and workers. It
also provides incentives to employees for efficient work.
13. Standard costing facilitates management by exception. It helps the management in
concentrating its attention on cases which are below the standards set.
14. Standard costing helps in effective delegation of authority and responsibility. As a result,
the management can control the affairs of various departments effectively.
15. Setting of standard involves effective utilisation of men, material and machines. It leads to
economy and increased productivity in all business activities.
16. It simplifies costing procedures and reporting. It reduces clerical work since standard
rates are fixed for material pricing, overhead allocation apportionment, etc.
17. It makes the work of valuation of inventory easier. This is because inventory is valued at
predetermined costs.
10.5 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 Inaccurate, unreliable and out-of-date standards do more harm than any good.
10.6 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.
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