Question 3 (d)

Standard costing: meaning, advantages and limitations as a technique of cost control

6 marks

Time to write
About 12 minutes
Topic
Standard costing

Question

Question 3 (d) · 6 marks

What is meant by Standard costing? Explain briefly, as a technique of Cost Control, the advantages and limitations of standard costing.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

  • What is meant…?Explain…Two asks in one question: answer both.
  • brieflyShort headed points, no long paragraphs.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Meaning of standard costing 2 marks 2 min
  3. 2 Advantages 2 marks 4 min
  4. 3 Limitations 2 marks 4 min
  5. Check: every ask answered, key terms underlined 1 min

Easy marks

  • Meaning of standard costing (step 1, 2 marks): a clear definition and a line on what it covers. It opens the answer, so it takes a minute or two.

Short on time? Keep step 1 short. Trim steps 2 and 3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Meaning of standard costing

Standard costing is a technique of cost control in which standard costs are set in advance for each element of cost, material quantity and price, labour time and rate, variable and fixed overheads, actual costs are recorded, the two are compared, the differences (variances) are analysed by cause and by the person responsible, and corrective action is taken. Standards represent what costs should be under efficient operating conditions.

Advantages

  1. Cost control. Variances show where costs exceed what they should be, and by how much.

  2. Responsibility. Variances are traced to responsible managers (price variances to purchasing, usage and efficiency variances to production).

  3. Management by exception. Only significant variances need attention, saving management time.

  4. Efficiency. Setting standards requires study of methods, which itself improves efficiency.

  5. Budgeting and pricing. Standard costs make budgets and price quotations easier and more reliable.

  6. Simpler accounting. Stocks valued at standard simplify records and reporting.

  7. Motivation. Clear targets encourage workers and managers, especially when linked to incentives.

  8. Inventory valuation and price fixing are made easier, since stocks and quotations use the same standard rates.

  9. Cost consciousness grows throughout the organisation, because every department knows its targets.

Limitations

  1. Setting standards is difficult and costly, especially for non-repetitive work.
  2. Standards become outdated as prices, methods and technology change; frequent revision is needed.
  3. Unsuitable for job or one-off production where operations are not standardised.
  4. Variances may be misinterpreted: a favourable price variance may come from buying poor material that later causes an adverse usage variance.
  5. Behavioural problems: tight standards may demotivate, while loose standards hide inefficiency.
  6. Some costs are hard to standardise, such as research or administrative costs.
  7. Cost of operation. Analysing many variances every period needs trained staff and a good recording system, which a small firm may not afford.

Where the 6 marks sit

#ComponentMarks
1Meaning of standard costing2
2Advantages2
3Limitations2
Total6
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