Question

Is this a manufacturing, merchandising, or service company? Explain whether Ford Motor Company is a good candidate for standard costing. Describe the benefits of standard costing to the company from the standpoint of pricing products or services, performance evaluation, and financial reporting.

Answer 1

Advantages of Standard Costing:

1. Cost Control: Standard costing is universally recognised as a powerful cost control system. Controlling and reducing costs becomes a systematic practice under standard costing.

2. Elimination of Wastage and Inefficiency: Wastage and inefficiency in all aspects of the manufacturing process are curtailed, reduced and eliminated over a period of time if standard costing is in continuous operation.

3. Performance evaluation :Standard costing provides the norms and yard sticks with which the actual performance can be measured and assessed.

4.Fixing Responsibility: Variance analysis can determine the persons responsible for each variance. Shifting or evading responsibility is not easy under this system.

5. Production and Pricing Policies: Standards are valuable guides to the management in the formulation of pricing policies and production decisions.

6. Planning and Budgeting: being predetermined costs on scientific basis, standard costs are also useful in planning the operations. Valuation of stocks becomes a simple process by valuing them at standard cost.