Question

Explain the advantages of standard costing

Answer 1

Standard Cost is nothing but the cost that would ideally be incurred on performing a particular activity or producing a goods/services. Setting such standards and evaluating the actual performance and cost against such set standard cost is the essence of standard costing. The major advantage of standard costing is to help us locate the factor or area that does not perform as per our expectation and has high cost as against the standard. Once such factor is identified, steps can be taken to improve the situation and reduce cost. For example - if one observes that direct material cost is the area not working as per our expectation, one can focus on supplier agreements and try to find what goes wrong so that the cost of direct material can be controlled. Apart from cost control, standard costing helps us to fix accountability for inefficiencies. Various variances are calculated under a typical standard costing approach which helps us to identify the exact inefficient area and the management can then focus and utilise its limited time to ensure cost reduction there. So standard costing helps to ensure optimum utilisation of management's time and efforts in the right direction as the managers can then delegate the authority of less or no problematic areas to other staff. Setting standards involves analysis and forecast and therefore is in line with company's planning and budgeting activities. Hence we see that standard costing has many advantages.