Advantages & Disadvantages of Standard Costing (Cambridge (CIE) A Level Accounting): Revision Note

Advantages & disadvantages of standard costing

What are the advantages of standard costing?

• Control

  • Helps the business to control the material and labour cost, especially those that have an adverse variance

• Set prices

  • A business can use the variance analysis to help understand the forecasted cost of production

    • Cost-plus pricing or a mark-up pricing strategy can be used to set selling prices

• Investigate potential problems

  • The variance analysis can help detect areas of concern in the financial plan

    • Each adverse and favourable variance should be investigated to look at the possible causes, which can lead to better decision-making

• Planning

  • Key business decision-making is made easier with good financial planning

    • Preparing standard costing helps plan future labour and material cost

    • Also, planning for sales will help plan the use of capital and labour resources

• Motivation

  • Setting standard costing can be motivating for the employees with good target settings

What are the disadvantages of standard costing?

• External factors

  • When preparing variances, key external factors such as inflation, interest rates and other economic factors are ignored

• Causes of variances are not obvious

  • It is not always possible to identify a clear cause for variances.

    • Further investigation could be time-consuming and costly

• De-motivation

  • If the standard targets are not realistic, this could demotivate the employees