Standard Costing as management tool | Advantages of Standard Costing

Standard costing can be used as management tool. By knowing cost information, the management can take effective decision. Besides, the following advantages can be derived by using standard costing and standard costing can be used as management tool.

Advantages of Standard Costing / Std Costing as mgmt tool

1. Fixing of Standard Price: The standard price is fixed for inventory as raw material and finished goods which are keeping for sale. Moreover, profit planning is also done with the help of standard costing.

2. Framing of Production Policy: Production policy can be easily framed through setting standard for raw materials in terms of price and quantity, standard hour and standard output for actual input.

3. Comparison and Analysis of Data: Whenever the standards are set, the standards can be compared with actual to find the variances. The causes for the variances may be due to internal factors and external factors. In this way, the causes for the variances can be find out for taking necessary remedial action.

4. Emphasis on Cost: The attitude of staff, management and workers are changed into cost consciousness. Besides, incentive scheme may also be prepared on the basis of standard costing technique.

5. Better Forecasting: The causes for the probable variances are taken into consideration to prepare effective budget. In this way, better forecasting of sales can be made very easily.

6. Balancing of Authority and Responsibility: Authority is vested with officials to adopt setting standards in various functional activities. By comparing standard with actuals, controllable variances are taken into account very seriously. In this way responsibility is fixed on the respective officials. In other words, authority is delegated for adopting standard costing technique and responsibility is fixed if there is any controllable variances thereby balancing of authority with responsibility.

7. Management by Exception: The variances can be divided into two i.e. favorable variances and unfavorable variances. The favorable variances bring benefits to the organization. The unfavorable variances bring loss to the organization. Hence, the management is considering only unfavorable variances by the application of management by exception.

8. Reduce the Costs: Standard price is fixed for raw materials and standard rate is fixed for labour. And, standards are fixed for variable overhead and fixed overheads separately. In this way, costs are controlled and reduced to some extent.

9. Showing Better Efficiency: Labor rate is fixed for skilled, semiskilled and unskilled workers separately. It means that labor rate is fixed on the basis of the efficiency. Hence, the workers are automatically forced to show their efficiency and get their deserving earnings.

10. Results Higher Productivity: Standard Hour is fixed for each product in each process separately. Besides, standard output for actual input is also determined. In this way, each section or division shows the higher productivity.

11. Elimination of Wastage and Inefficiency: Standard quantity of material usage is fixed. This type of practice leads to reducing wastage and increase the efficiency of workers.

12. Yardsticks: The standard costing technique provides yardsticks so that the actual performance is measured and assess the level of achievement of standard.

13. Focusing the Area of Inefficiency: Whenever the actual performance is measured and compared with the predetermined standard, the management can easily find out the area of inefficiency. It also measures the extent of the inefficiency.

14. Fixing Responsibility: The variance analysis discloses the controllable and uncontrollable factors for such variance. The management cannot do anything with regard to uncontrollable factors. But, the controllable factors can be controlled by the executives. In this way, the responsibility of executives is easily fixed for controllable factors which are leading to unfavorable variances.

15. Inventory Valuation: Standard cost is used for valuing the closing inventory. In this way, valuation of inventory is made very easy.

16. Easy Assignment of Work: Top management can easily assign the work to the lower levels since control is very through fixing standards.

17. Calculation of Wage is Easy: Standard labor rate is fixed under standard costing technique. Moreover, Labor rate is fixed for skilled, semiskilled and unskilled workers separately. In this way, calculation of wage is made very easy.

18. Easy Preparation of Budget: On the basis of information available under standard costing technique, the preparation of budget is very easy.

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