Question

What are the advantages and disadvantages of developing and using standard costs for performance evaluation?

Answer 1

Advantages of Standard Costing are:-

1. It helps in establishing budgets.

2. It contr ols costs, directing and motivating employees, and measuring efficiencies.

3. It Promotes possible cost reduction.

4. It helps to simplify costing procedures and expediting cost reports.

5. It assigns costs to materials, work in process, and finished goods inventories.

6. It helps to form the basis for establishing bids and contracts and for setting sales prices.

Disadvantages of Standard Costing are:-

1. Standard cost variance reports are usually prepared every month and often are released days or even weeks after the end of the month. As a consequence, the information in the reports may be so stale that it is almost useless.

2. If managers are insensitive and use variance reports as a club, morale may suffer. Employees should receive positive reinforcement for work well done. Management, by exception, by its nature, tends to focus on the negative.

3. Direct labor may be essentially fixed, and then an undue emphasis on labor efficiency variances creates pressure to build excess work in process and finished goods inventories.

4. Problem with misunderstanding standards that in some cases, a “favorable” variance can be as bad or worse than an “unfavorable” variance.

5. There may be a tendency with standard cost reporting systems to emphasize meeting the standards to the exclusion of other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction.