Explain the advantages and disadvantages of Standard costing as a cost control technique. How standard costing is related to Budgetary cost?
Standard costs are amount that are incurred in an ideal circumstance for raw materials, direct labour, and factory overhead. Standard costs are developed prior to the applicable operating periods and remain in effect until circumstances require their revision. Management's routine comparison of actual costs with standard costs reveals the difference, or cost variances. Cost variances are unfavorable when actual costs exceed standard costs and favorable when standard costs exceed actual costs. The concept of standard cost can be used informally in special periodic management reports comparing actual costs with what costs should have been according to plans. However, standard costs are most effectively used when they and related variances are recorded in accounts. Under such standard cost procedures, work in progress, finishing goods, and cost of goods sold are recorded at the standard costs for raw materials, direct labour, and factory overhead. Differences between the standard costs of goods produced and actual cost incurred are recorded as either favorable or unfavorable variances in appropriately titled accounts.
Standard costing has been the predominant accounting system in manufacturing companies for both cost control and product costing purposes, for several decades. The use of standard costing is spreading to non- manufacturing forms as well. The widespread use of standard costing over such a long period suggests that it has traditionally been perceived as offering several advantages.
Some advantages traditionally attributed to standard costing include the following:
1. Standard costing provide basis for sensible cost comparisons “ It doesn't make sense
to compare budgeted costs at one (planned) activity level with actual costs incurred at a different (actual)