Accounting For Managers - Cost Estimation And Control-Standard Costing And Variance Analysis
Objectives, Advantages and Limitations Of Standard Costing
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To achieve the above objectives the following steps are adopted in standard costing:
Objectives Of Standard Costing
ՖՖ The objectives of standard costing technique are as follows:
ՖՖ To provide a formal basis for assessing performance and efficiency.
ՖՖ To control costs by establishing standards and analyzing of variances.
ՖՖ To enable the principle of ‘management by exception’ to be practiced at the detailed operational level.
ՖՖ To assist in setting budgets
To achieve the above objectives the following steps are adopted in standard costing:
ՖՖ Determining the standard for direct material, direct labour and different overheads
ՖՖ Ascertaining the actual cost of production
ՖՖ Ascertaining the variances by comparing actual costs with standard costs
ՖՖ Analyse the variances to know the reason for variances.
ՖՖ Adopting corrective measures to control the variances in futures.
Advantages Of Standard Costing
A good standard costing system results in the following advantages:
ՖՖ The setting of standards should result in the best resources and methods being used and thereby increase efficiency.
ՖՖ Budgets are compiled from standards.
ՖՖ Actual costs can be compared with standard costs in order to evaluate performance
ՖՖ Areas of strengths and weakness are highlighted
ՖՖ It acts as a form of feed forward control that allows an organization to plan the manufacturing inputs required for different levels of output.
ՖՖ It acts as a form of feedback control by highlighting performance that did not achieve the standard set.
ՖՖ It operates via the management by exception principle where only those variances (i.e. Differences between actual and expected results) which are outside certain tolerance limits are investigated, thereby saving managerial time and maximizing managerial efficiency.
ՖՖ The process of setting, revising and monitoring standards encourages reappraised of methods, materials and techniques thus leading to cost control as an immediate effect and to cost reduction as a long term effect.
Limitations Of Standard Costing
Standard costing suffers from the following limitations:
ՖՖ A lot of input data is required which can be expensive
ՖՖ Unless standards are accurately set any performance evaluation will be meaningless.
ՖՖ Uncertainty in standard costing can be caused by inflation, technological change, economic and political factors, etc.
Standards therefore need to be continually updated and revised.
ՖՖ The maintenance of the cost data base is expensive.
ՖՖ Setting of standards involves forecasting and subjective judgments with inherent possibilities of error and ambiguity.
ՖՖ Standard costing cannot be adopted in the firms which do not have uniform and standard production programme.
ՖՖ It is very difficult to predict controllable and uncontrollable variances.
Tags : Accounting For Managers - Cost Estimation And Control-Standard Costing And Variance Analysis
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