Standard Costing: Importance, Advantages, and Disadvantages

This paper analyzes and provides an understanding of standard costing, its importance, advantages, and disadvantages in the contemporary business environment. It discusses the concept of standard costing, its framework, and the advantages and disadvantages associated with it. The paper aims to provide a clear understanding of standard costing and its relevance in the current business environment.

Running head: STANDARD COSTING
STANDARD COSTING
Name of the Student:
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Author Note

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This paper is prepared to analyse and provide the understanding of the standard
costing. This paper analyse the every possible aspect of the standard costing. This paper
discuss about the concept of standard costing along with their importance in the in the
contemporary business environment. Further, the paper focuses in the framework of the
standard costing as well as the advantages of the standard costing in respect of the current
business environment. The paper also discuss the disadvantages of the standard costing. In
whole this paper present the argument in both favour and against of the standard costing. The
main purpose of the paper is to provide the clear understanding of the standard costing and
their advantages, disadvantage, framework and the importance in respect of the current
business environment.
Standard Costing
Standard costing is an accounting system that is used by the many manufacturing firm
to determine the difference between the cost of the produce goods and the total cost incurred
to produce the goods (Bargerstock & Shi, 2016). In simple words, the standard costing is a
accounting method that calculates the difference between the cost of produced goods and the
expenses of the producing such goods. This difference is termed as the variance and the cost
incurred by the firm to produce the goods in termed as the standard cost in the standard
costing accounting system.
The main objective of the standard costing is to determine the difference between the
cost of produced goods and the cost related with the production of goods (Maskell, Baggaley
& Grasso, 2016). This information is very much need by the management of the firm to make
the several production related decision as well as to know and increase the efficiency of the
firm related to the production activities.

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Importance
As, the standard costing is one of the most advanced method of the cost accounting.
Hence, this have the various importance in the contemporary business environment. The
some major importance of the standard costing are as follows: -
 Increase the efficiency: - The management of the firm fixes the direct cost of
material, labour and other overhead in the basis of the standard costing. This
predetermined standard cost of the production helps the firm to increase its efficiency
related to the production (Horngren et al., 2015). The standard costing is also
important to analyse the efficiency of the firm related to its production. By using, the
standard cost the management can prepared their production related budget, which
also helps the management to increase the efficiency of the firm.
 Resources utilization: - The standard costing is also important to utilize the
resources by the firm. This helps the management and the firm to utilize the resource
efficiently (Jiao & Tseng, 2019). This method help the management to determine the
quantity of the resource that is optimum for the firm, which increase the efficiency of
the firm to utilize the resources.
 Budgetary control: - This method is also plays an important role in preparing and
controlling the budget of the firm relating to manufacturing. This method provides all
the production related information those are required to prepare an effective
production budget for the firm.
 Decision: - The standard costing is very important to make the production
related decision for the firm (Rao & Bargerstock, 2011). This provide the detail of the

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production of the firm for both past and present performance to control the future
performance.
Apart from the above- discussed importance, the standard costing also important for
the various other production related functions of the firm.
Advantages
The standard costing have several uses and implication in the production related
functions of the firm. In that context, the standard costing have the following advantages: -
 Cost reduction: - The standard costing analyse the production operation of the firm
and provides the detail information about the production of the firm (Panchenko,
2017). This information helps the management to reduce the production cost of the
firm.
 Pricing: - The standard costing calculate the total cost of the production of the
produced goods. This helps the management to determine the selling price of the
product only by adding their merging in the cost of production.
 Inventory valuation: - The standard costing also help the management of the firm
to determine the value of the inventories (Marie & Rao, 2016). As this method,
simply calculates the value of inventories by multiplying the standard cost per unit
by the total units of inventory.
 Cost control: - The standard costing determined the variance of the cost whether it
is favourable or not this helps the firm to control the cost of the production.
 Budgeting: - The standard costing also help the management to make the budget for
the firm (Zimmerman & Yahya-Zadeh, 2017). This provides the all production
related information of the firm for both past and present period to make the budget
for the future.

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There are many other advantages that the standard costing have, which positively affect
the performance and efficiency of the firm related to the production.
Disadvantages
Apart from the above- discussed advantages, the standard costing also have some
disadvantages. The followings are the some important disadvantages of the standard costing:
-
 Expensive: - The implication of the standard cost is an expensive procedure. As this
system requires the extensive research of output requirement of the labour, material
and other overhead consumes a lot of money (Shillinglaw & Campling, 2015).
Hence, the implementation of the standard costing need lots of money.
 Time consuming: - As this costing system require lots of research in the initial stage
hence, this consumes too much time to be implemented in the business.
 Obsolescence:- In the first changing world, the standard costing quickly become out
dated and does not have any relevance with the operation of the firm. Hence, the firm
lose its control over the cost of production.
 Dependency: - The standard costing system is depended in the business
environment. The effectiveness in the performance of the standard costing also
depends in the business environment (Sulaiman, Nazli Nik Ahmad & Mohd Alwi,
2015). If the business environment is favourable for the standard costing then it
perform effectively otherwise not. This is one of the biggest disadvantage of the
standard costing.
 Subjective: - The subjective approach of the standard costing is also a drawback for
it. The standard costing perform only in the basis of the one aspect of production in

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one time and does not give focus in the other aspect of the production that can affect
the efficiency of thee firm.
Apart from the above- mentioned disadvantages, there are many other disadvantages of
the standard costing affect the performance of the firm.
This paper concludes that the standards costing is a method that calculate the
difference between the cost of product and the cost related to the production of the product.
The standard costing have several importance in the production related functions of the firm.
This helps to increase the efficiency of the firm and help the management to prepare the
budget and to make several production related decisions. This system have several
advantages and enhance the production related performance of the firm. Apart from the
several importance and advantages, the standard costing also have some disadvantages like
obsolescence, time taking process as well as the expensive to implement in the business. In
the overview the standard costing is one of the best method costing, which helps the firm to
enhance their efficiency in the production.

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References
Bargerstock, A., & Shi, Y. (2016). Leaning away from standard costing: Lean companies
need value stream costing and new performance metrics. Strategic Finance, 97(12),
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Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T.
(2017). Management and cost accounting. Harlow: Financial Times/Prentice Hall.
Jiao, J., & Tseng, M. M. (2019). A pragmatic approach to product costing based on standard
time estimation. International Journal of Operations & Production
Management, 19(7), 738-755.
Marie, A., & Rao, A. (2016). Is standard costing still relevant? Evidence from
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Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press.
Panchenko, A. (2017). Standard Costing: Advantages and Disadvantages.
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manufacturing enterprises: a structuration theory approach. Management Accounting
Quarterly, 13(1), 47.
Shillinglaw, G., & Campling, J. (2015). Managerial cost accounting.
Sulaiman, M., Nazli Nik Ahmad, N., & Mohd Alwi, N. (2015). Is standard costing obsolete?
Empirical evidence from Malaysia. Managerial Auditing Journal, 20(2), 109-124.
Zimmerman, J. L., & Yahya-Zadeh, M. (2017). Accounting for decision making and
control. Issues in Accounting Education, 26(1), 258-259.

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