Limitations of Standard Costing

Limitations of Standard Costing

Limitations of standard costing have been explained below

1.    Technical Job

Standard development is very technical Job ,and it requires sound technical knowledge, huge experience and deep understanding of business. A wrong standard can produce horrible results. Therefore standard development process requires a resources.

2.    Time Consuming Job

Standard development is time consuming job, because it requires analyses of  data related to a standard. It means at first place data would be collected for analyses, and then a detail analyses would be performed to develop an appropriate standard. This collection & analyses of data requires a lot of time.

3.    Standard Product Phenomena

Standard costing is used by only those industries, which produces the standard product . It means that this costing system cannot be used by the many domestic industries , which does not produce standard products. (many domestic industries lack standardization).

4.    controlling Or Costing Method

Standard costing put over emphases on the cost control issues. Thus Standard costing system works more like a controlling tool than a costing method. many organization use standard costing only for future estimates (budgets) and performance measurements.Thus standard costing has limited role in the product costing.

5.    Statutory Reporting is not possible 

Standard costing cannot be used to prepare the statuary accounts, because standard costs are not  actual cost. However, standard costing result may be altered (adjusted) for the purpose of preparation of statutory reports.

Uses of Standard Costing

Uses of Standard Costing

1.    Alternative of Cost Accounting

Standard costing provides alternative bases of producing the cost accounts. Sometime data is not timely available or collected at the end of period, then standard costing is used to prepare cost accounts.

2.    Budget preparation

First use of standard costing is budget preparation. Standard costing provides basic information for budget preparation i.e. unit cost of product.

3.    Performance measurement

Standard costing can be used to measure performance of different manager. Actual results are measured with expected results. for example actual cost incurred is compared with the standard cost for measuring the performance of production department or manager.

4.    Controlling Tool

Standard costing is also used as controlling tool for different operations. Results of different department are measured in relation to standard results and appropriate control action is suggested.