Question

Respond to the following in a minimum of 175 words:

What are some of the advantages and disadvantages of standard costs? How do managers determine what the standard cost should be? Describe the effect of inaccurate standard costs on financial reporting.

Answer 1

Standard costs help ascertain the variances when compared with actual costs and analyze the differences. When the variances are unfavorable for the actual units manufactured, the inefficiencies and wastage is eliminated through taking corrective measures. The costing fixes responsibility on the manager for the particular variances. Standard costing is useful to determine the price of a product or the revenue that the company expects to earn in the future and likewise decide the allocation of resources. The major disadvantage with standard costs is that it is not possible to determine accurately the prices and rates in case of changing economic situations. It only considers quantitive factors of measurement which may not ideally be the case always. The standard costs are determined through current market prices or rate, through analysis of peer companies costing , on analysis of the past performance of the company, the level of performance that the organization expects and level of performance by other similar organizations. Inaccurate standard costs can lead to incorrect decisions being taken, loss of revenue, extra costs being incurred and inaccurate analysis of financials.