Objectives of Standard Costing:
1. To institute a control mechanism on all the elements of costs that affect production and sales
2. To measure different operational efficiencies and check the wastages
3. To improve the delegation of authority and generate a sense of responsibility among the employees
4. To develop a cost consciousness in the employees
5. To presume the production costs, sales and profit
6. To avail the benefits of 'Management by exception.'
7. To bring about a vivid progressive vision and sagacious decision making at each managerial level.
Advantages of Standard Costing:
1. Proper Planning: It helps to apply the principle of “Management by exception”. That is, the management need not worry over those activities which proceed in tandem plans. It is only on the issues of exceptions that they have to concentrate.
2. Efficient Cost Control: Standard Costing is a tool for the management to gain reduction in the cost and control over it. Under this technique, differences are analyzed and responsibilities are determined.
3. Motivational Factor: Labour efficiency is promoted and they are destined to be cost conscious. Standards provide incentives and motivation to work with greater effort. This increases efficiency and productivity.
4. Comparison of Forecasting and Outcome: A target of efficiency is set for the employees and the cost consciousness is stimulated. Since the process of standard costing allow an appraisal to be made of personnel, machines and method of working, current inefficiencies come to the notice and get eliminated.
5. Inventory Control: Standard costing facilitates inventory control and simplifies inventory valuations. This ensures uniform pricing of stocks in the form of raw materials, work‐in‐progress and finished goods.
6. Economical System: Standard costing system is economical system from the viewpoint that it does not require detailed records. It also des not require a big staff. It results in the reduction in paper work in accounting and needs very few records. Thus, there is saving of time as well as money.
7. Helpful in Budgeting: Budgets are prepared on the basis of standard costing. Standards which are set up in respect of materials, labour and overheads, are helpful in preparing various budgets. For example, flexible budget, sales budget, etc.
8. Helps Formulate Policies: This technique is a valuable aid to the management in determining prices and formulating production policies. Standard costing equips cost estimates while planning the production of new products.
9. Helps Distinguish Activities: Standard costing helps in distinguishing between skilled and unskilled activities. So the skilled worker only gives pays attention to improving the activities of the unskilled workers.
10. Eliminates Wastage: Through fixing standard, certain waste such as material wastage, idle time, lost machine hours, etc. are reduced.
Limitations of Standard Costing:
1. Costly System: Because the Standard Costing requires highly skillful and competent personnel, it becomes a costly system too. For the same experts are paid high remuneration.
2. Difficulties in Fixation of Standard: It is always difficult to determine precise standard costs in a given situation which will coincide with actual cost when operations are over. Standard cost are determined partly by the past experience and partly by the cost projections based on advanced statistical techniques. Thus, uncertainties revolve around standards.
3. Constraint for Service Industry: Standard costing is applied for planning and controlling manufacturing costs. Thus, it cannot be applied in a service industry.
4. Consistency of Standard: because the standards of marginal costing fluctuate and vary time to time, it is difficult to always sustain and continue the same standards.
5. Unsuitable for Non‐standardised Products: Standard costing is expensive and unsuitable for job manufacturing industries as they manufacture non standardized products such as catering, tailoring, printing, etc.
6. Relatively Fixed Standards: A business may not be able to keep standards up‐to‐date. In other words, a business may not revise standards to keep pace with the frequent changes in manufacturing conditions. Firms may avoid revising standards as it is a costly affair.
7. Difficulties for Small Industries: Establishment of standards and their implementation involve initial high costs. Standards have to be revised and new standards be fixed involving larger costs. Thus, small firms find it expensive to operate standard costing system. This system is not fit for each type of industries.
8. Discouragement for Workers: Sometimes the employees and workers are discouraged when the standards are fixed at a high level. The unreal high standards may adverse by effect the morale of workers rather than working as an incentive for better efficiency.
9. Inaccurate Diverse Results: Inaccurate and unreliable standards cause misleading results and thus may not enjoy the confidence of the users of this system.