Question

Explain in detail ANY FOUR drawbacks (with example) of standard costing system. Also, explain briefly who should hold responsible for material and labour variances.

Answer 1

Answer:-

1) Expensive - In standard costing we have fixed standard for raw materials in terms of price and quantity, and fixed standard for labour in terms of rate and number of workers with level of efficiency. Moreover, standard is fixed for fixed overhead and variable overhead. Hence, there is a need of incurring heavy expenses for fixing above mentioned standards since the fixing of standard requires high order of skill i.e. experts.

2) Continous Revision of Standard: Future is uncertainty and the business environment is fast changing, fixing of standard requires the revision at Continous intervals. If not so, there is no meaning of fixing standard. Moreover, revision of standards is a tedious process.

3) Fast Changing Technology: The industries liable for frequent technological changes will not be suitable for standard costing system.

4) Labour Problems: If the standards are reasonable and attainable, there is no problem on the part of workers. The incorrect standards may lead to constant labour problems.

Example - If standard is that 20 product need to be produced in a day but currently labour are only able to produce 10 unit achieving 20 unit is not achievable and it may cause distress and labour may move out of company/organisation

Responsible for material and labour variance:-

Responsibility for setting standard is vested with the Standard Committee. It consists of following team:

1. Purchase Manager
2. Production Manager
3. Personnel Manager
4. Time and Motion Study Engineers
5. Marketing Manager and Cost Accountant.