Advantages of standard costing
1) Measuring efficiency: standard costing is a yardstick for measuring efficiency. The comparison of actual costs with standard costs enables the management to evaluate performance of various cost centers.
2) Formulation of production and price policy: standard costing is helpful in formulating predicate policies. The standards are set by studying all existing conditions. It becomes easy to formulate production plans by taking into account standard costs. It is also helpful for finding prices of various products.
3) Determination of variance: by comparing actual costs with standard cots variances are determined. Management is able to spot out the place of inefficiencies. It can fix responsibility for deviation in performance. It is possible to take corrective measures at the earliest.
4) Reduction of work: in historical costing recording are maintained for determining the costs. Standard costing reduces clerical work to a considerable extent and management is supplied with useful importance. In this system only necessary information will be recorded and superfluous data are avoided.
5) Management by exception: with the use of standard costing the targets of different individuals are fixed. If the performance is according to predetermined standards then there is nothing to worry. The attention of management is drawn only when actual performance is less than the digested performance. Management by exception means that everybody is given a target to be achieved and management need not supervise each and everything.
6) Facilitates cost control: every costing system aims at cost control and cost reduction. Standard costing helps in achieving these aims. The standards are being constantly analyzed and an effort is made to improve efficiency. Whenever a variance occurs the reasons are studied and immediate corrective measures are undertaken. The action taken in spotting weak points enables cost control system.
7) Eliminating inefficiencies: the setting of standard for different elements of cost requires a detailed study of different aspects. The standards are differently elements set for manufacturing administrative and selling expenses. Improved methods are used for setting these standards. The determination of manufacturing expenses will require item and motion study for labor and effective material control devices for materials, etc. similar studies will be needed for finding other expenses. All these studies will make it possible to eliminate inefficiencies at different steps.
8) Helpful in taking important decisions: standard costing provides useful information to the management in taking important decision. The problem created by inflation, rising prices, etc. can be effectively tackled with the help of standard costing. It can also be used to provide incentive plans for employees, etc.