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Advantages & Disadvantages of Standard Costing, Cost Management Video Lecture | Cost Management - B Com
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FAQs on Advantages & Disadvantages of Standard Costing, Cost Management Video Lecture - Cost Management - B Com
| 1. What is standard costing and what are its advantages and disadvantages? |  |
Ans. Standard costing is a management technique used to establish predetermined costs for materials, labor, and overheads. The predetermined costs, known as standard costs, are used as benchmarks to compare with actual costs and measure performance.
Advantages of standard costing include:
1. Cost control: Standard costing helps in identifying variances between standard and actual costs, allowing management to take corrective actions and control costs effectively.
2. Performance evaluation: It provides a basis for evaluating the performance of departments, managers, and employees by comparing actual costs with standard costs.
3. Decision-making: Standard costing facilitates decision-making by providing accurate and timely cost information, enabling management to make informed decisions about pricing, product mix, and cost reduction strategies.
Disadvantages of standard costing include:
1. Rigidity: Standard costs may become outdated if there are significant changes in market conditions, technology, or production methods. This can limit the usefulness of standard costing in dynamic and rapidly changing business environments.
2. Complexity: Implementing and maintaining a standard costing system can be complex and time-consuming, requiring accurate cost data, continuous monitoring, and regular updates of standards.
3. Focus on cost reduction: Standard costing may lead to a narrow focus on cost reduction, potentially neglecting other important aspects such as quality, customer satisfaction, and innovation.
| 2. How is standard costing useful in cost management? | |
Ans. Standard costing is useful in cost management in the following ways:
1. Cost planning: Standard costing helps in setting realistic cost targets by establishing predetermined costs based on historical data and industry benchmarks. This enables effective cost planning and budgeting.
2. Cost control: By comparing actual costs with standard costs, standard costing helps in identifying cost variances and their causes. This information allows management to take corrective actions and control costs effectively.
3. Performance measurement: Standard costing provides a basis for measuring and evaluating the performance of departments, managers, and employees. Variances between standard and actual costs can indicate areas of inefficiency or improvement opportunities.
4. Decision-making: Standard costing provides accurate and timely cost information, which is crucial for making informed decisions about pricing, product mix, make-or-buy decisions, and cost reduction strategies.
5. Continuous improvement: Standard costing facilitates continuous improvement by identifying cost-saving opportunities and encouraging cost-consciousness among employees. It provides a framework for setting targets, monitoring performance, and implementing improvement initiatives.
| 3. What are the advantages of cost management in business? | |
Ans. The advantages of cost management in business include:
1. Profitability: Effective cost management helps in improving profitability by identifying cost-saving opportunities, optimizing resource allocation, and controlling expenses.
2. Competitive advantage: By managing costs efficiently, businesses can offer competitive prices to customers, which can help in attracting and retaining customers in a competitive market.
3. Financial stability: Cost management ensures that a business operates within its financial means and avoids unnecessary expenses. This promotes financial stability and reduces the risk of financial distress.
4. Resource optimization: Cost management helps in optimizing the use of resources, such as materials, labor, and equipment. This leads to improved productivity and efficiency, resulting in cost savings.
5. Decision-making: Accurate cost information provided by cost management enables informed decision-making. It helps in evaluating the profitability of different products, pricing strategies, investment decisions, and cost reduction initiatives.
| 4. How does standard costing help in decision-making? | |
Ans. Standard costing helps in decision-making by providing accurate and timely cost information. Here are some ways in which standard costing facilitates decision-making:
1. Pricing decisions: Standard costing provides a basis for calculating the cost of producing goods or services. This information is crucial for setting competitive prices that cover costs and generate a profit.
2. Product mix decisions: By comparing the standard costs of different products, standard costing helps in determining which products are more profitable and should be given priority. It enables businesses to focus on products that contribute the most to profitability.
3. Make-or-buy decisions: Standard costing allows businesses to compare the costs of producing a product or service internally versus purchasing it from external suppliers. This helps in deciding whether to make or buy a particular component or service.
4. Cost reduction decisions: Standard costing identifies cost variances and their causes, highlighting areas of inefficiency or wastage. This information enables management to make informed decisions about cost reduction strategies and process improvements.
5. Capital investment decisions: Standard costing provides cost data that can be used to evaluate the financial viability of capital investment projects. It helps in estimating the future costs and benefits associated with the investment, aiding in decision-making.
| 5. What are the potential disadvantages of standard costing in cost management? | |
Ans. The potential disadvantages of standard costing in cost management include:
1. Overemphasis on cost reduction: Standard costing may lead to a narrow focus on cost reduction, potentially neglecting other important aspects such as quality, customer satisfaction, and innovation. This can hinder long-term business growth and competitiveness.
2. Rigidity: Standard costs may become outdated if there are significant changes in market conditions, technology, or production methods. This can limit the usefulness of standard costing in dynamic and rapidly changing business environments.
3. Complexity: Implementing and maintaining a standard costing system can be complex and time-consuming. It requires accurate cost data, continuous monitoring, and regular updates of standards. Small businesses or those with limited resources may find it challenging to implement and manage a standard costing system effectively.
4. Potential for manipulation: Standard costing relies on predetermined cost standards, which can be subject to manipulation or bias. This can undermine the accuracy and reliability of cost information, affecting decision-making and performance evaluation.
5. Lack of flexibility: Standard costing assumes a stable production environment and consistent production volumes. It may not be suitable for businesses with highly variable production processes or those operating in volatile markets. In such cases, alternative costing methods may be more appropriate.
Text Transcript from Video
nice my name is sheikh john bersia and
you can simply call me channel today
topic is standard cost definition and
advantages and limitation of standard
costing so before going to explaining
all these things i'll let you know what
is standard cost and you can allocate
what is standard cost know standard
costing is an important sub topic of
cost accounting so standard costs are
usually associated with manufacturing
companies cost of direct material direct
labor and manufacturing overheads so a
standard cost has been described has a
predetermined cost just remember this
word it is a predetermined cost an
estimated futurecast
an expected cost a budget unit cost a
forecast yes it should be a cost so
standard costs are often a part of
manufacturer's annual profit plan and
operating budgets so standard cost are
also called predetermined Cost Estimator
cost and expected cost and a budget unit
cost and also called as forecast cost
sure it is it is main ting in a manager
chest annual profit plan and operating
budgets standard costing is an
accounting technique that some
manufacturers used to identify
differences are variances between the
actual cost of goods that were produced
and the cost that should have occur for
those goods so the cost should have
occurred for the actual goods output are
known as standard cost standard cost is
likely integrated with the manufactures
budget that is a profit plan and master
budget for an accounting year and
involve the product cost direct material
direct labor and manufacturing overheads
at the end of accounting period the
actual amounts and cost of dark material
then utilize the amount of amounts and
pay rates for direct labor
to compare it with previous lizard
standards when you compare the actual
cost to the standard cost and examining
the variance between them it allows
managers to look forward to improve cost
control cost management and operational
efficiency this comparison of actual
cost with standard cost is called as
variance analysis and it is vital for
controlling cost and identifying ways
for improving efficiency and
profitability if actual construction
still exceeds the standard cost it is
unfavorable variances on the other hand
if actual cost is less than the standard
cost it is a favorable variance so
variance analysis is usually conducted
for that material cost direct labor cost
overhead cost so the use of standard
costing is useful for Mis profit
planning inventory control product
pricing decision-making cost control
both standards budgets are concerned
with setting performance and cost levels
for control purpose so they are similar
in principles although they are
different in scope standards our unit
concept so they applied to a particular
products to individual operations or
process and you're gonna look at what is
the advantages of standard costing here
and advantages are leads to optimum
utilization of resources reverse cost
performance by reporting distinct
variance and facilities management
exception helps in planning control and
price fixation create cost consciousness
and sets defined targets to achieve so
these are the and increased cost
reduction so these are the main
advantages of standard costing and you
can allocate to what is the
disadvantages of standard costing or
limitations are here so difficulty in
setting standards so it is very
difficult to setting standards for
direct material and direct labor so this
is one of the greatest limitation and it
is not suitable for all business and it
is not suitable to in dust
also so it is a difficult to fix
responsibility the technological changes
these are the limitations for standard
costing so I also provided some basic
key points so you can allocate the basic
points which are thank you very much for
watching our videos and if you like this
video do not forget to subscribe and
share our videos thank you very much
you can simply call me channel today
topic is standard cost definition and
advantages and limitation of standard
costing so before going to explaining
all these things i'll let you know what
is standard cost and you can allocate
what is standard cost know standard
costing is an important sub topic of
cost accounting so standard costs are
usually associated with manufacturing
companies cost of direct material direct
labor and manufacturing overheads so a
standard cost has been described has a
predetermined cost just remember this
word it is a predetermined cost an
estimated futurecast
an expected cost a budget unit cost a
forecast yes it should be a cost so
standard costs are often a part of
manufacturer's annual profit plan and
operating budgets so standard cost are
also called predetermined Cost Estimator
cost and expected cost and a budget unit
cost and also called as forecast cost
sure it is it is main ting in a manager
chest annual profit plan and operating
budgets standard costing is an
accounting technique that some
manufacturers used to identify
differences are variances between the
actual cost of goods that were produced
and the cost that should have occur for
those goods so the cost should have
occurred for the actual goods output are
known as standard cost standard cost is
likely integrated with the manufactures
budget that is a profit plan and master
budget for an accounting year and
involve the product cost direct material
direct labor and manufacturing overheads
at the end of accounting period the
actual amounts and cost of dark material
then utilize the amount of amounts and
pay rates for direct labor
to compare it with previous lizard
standards when you compare the actual
cost to the standard cost and examining
the variance between them it allows
managers to look forward to improve cost
control cost management and operational
efficiency this comparison of actual
cost with standard cost is called as
variance analysis and it is vital for
controlling cost and identifying ways
for improving efficiency and
profitability if actual construction
still exceeds the standard cost it is
unfavorable variances on the other hand
if actual cost is less than the standard
cost it is a favorable variance so
variance analysis is usually conducted
for that material cost direct labor cost
overhead cost so the use of standard
costing is useful for Mis profit
planning inventory control product
pricing decision-making cost control
both standards budgets are concerned
with setting performance and cost levels
for control purpose so they are similar
in principles although they are
different in scope standards our unit
concept so they applied to a particular
products to individual operations or
process and you're gonna look at what is
the advantages of standard costing here
and advantages are leads to optimum
utilization of resources reverse cost
performance by reporting distinct
variance and facilities management
exception helps in planning control and
price fixation create cost consciousness
and sets defined targets to achieve so
these are the and increased cost
reduction so these are the main
advantages of standard costing and you
can allocate to what is the
disadvantages of standard costing or
limitations are here so difficulty in
setting standards so it is very
difficult to setting standards for
direct material and direct labor so this
is one of the greatest limitation and it
is not suitable for all business and it
is not suitable to in dust
also so it is a difficult to fix
responsibility the technological changes
these are the limitations for standard
costing so I also provided some basic
key points so you can allocate the basic
points which are thank you very much for
watching our videos and if you like this
video do not forget to subscribe and
share our videos thank you very much
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Dec 23, 2024 Last updated |
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