Disadvantages of standard costing

1) Difficulty in setting standards: setting of standards in practice extremely difficult and complicated task. First it is not possible to forecast costs as some of the factors influencing them are unpredictable. Second, standards are set by human beings whose prejudices and biases are likely to influence the establishment of standards.

2) Inflexibility of standards: standards have the tendency of becoming inflexible or rigid overtime. Standards set at one time are based on assumed operating condition. Operating. Condition may changes very frequently; but it is not possible to revise standards every time the operating condition changes. The frequent revision of standards is difficult as well as expensive. The use of standards costs under the situation of frequent revision of standard are revised frequently, their effectiveness as a performance evaluation criterion will be marred. On the other hand, if the standards are not revised for changes in operating conditions they would becomes unrealistic. What should be done in practice is that standards should not be revised for every change in operating conditions, but they should be certainly adjusted if the change is significant.

3) Problems in variance analysis: standards costing help in managerial control through variance analysis. At time it is difficult to explain variances as problems are faced in distinguishing between conditions and non controllable elements of variances. For example the responsibilility of unfavorable material variance may be assigned to the production department. In fact production department has no control over material prices. Also the use of excessive units of raw material may be due to poor quality of material bought by purchases department. Or less qualified workers employed by personnel department, or inadequately repaired and maintained plant and machinery. If a variance is caused by random factor, it becomes all the more difficulty to explain the variance.

4) Discouraging impact of standards: standard are sometime considered to have discouraging impact on the efficiency and morale of individuals. Some of the recent studies on the impact of standard costing have revealed that standards are not welcome by workers and supervisors. They consider standards to be oppressive and resist their administration. it is therefore advisable that management should use a standards costing only when standards are acceptable to employees.

5) Unsuitable for small firms: standard cost system may be unsuitable to small firms. In small organization the production operation are simple also there is a direct contact between workers, supervisors and top management. Therefore a detailed system of analysis may not be necessary. Performance may be sought to be improved on personal basis.

6) Failure due to top management apathy: standard cost system would be an utter failure if top management dose not have a faith in it. For the success of standard costing, top management should not only take keen interest in is but should also seek genuine participation of all. At times, it becomes very difficult to seek the real support of top management. Top management may not disagree to the idea of introducing standard cost system but at the same time it may not take interest in its effective implementation.