Advantages of Standard Costing
1. Management via Exception: the standard costing is an example for management via exception. By studying the variances, management's attention is directed towards those items that are not proceeding as per to the plan. Most of the management's time is saved and can be directed to another value adding activities. Management merely concentrates on the 'few' exceptions reported.
2. Cost Reduction: The process of revising, setting and monitoring standards encourages reappraisal of methods, materials and techniques hence leading to cost reductions. Analysis of unfavourable variances directs cost analysis to factors such are making costs to exceed the budgeted costs hence these factors can be controlled as well as leading to cost reduction.
3. Pricing Standard costs serve like a reliable base of calculating net cost of producing a good or service, to that a margin can be added to find out the selling price.
4. Inventory Valuation Standard costing makes inventory valuation much easier, whether the real number of physical units in the inventory is identified, then the inventory value is simply determined via multiplying the standard cot per unit via the physical units.
5. Motivation: An appropriately developed standard costing system needs the full participation of all management levels upper, lower and middle levels and the employees. This creates motivation for the employees like they feel part of the system.
6. Cost Control: A well implemented standard costing system acts like a yardstick against all costs are measured to verify whether the variance from the standard is favourable or unfavourable. It creates cost consciousness in the organization and in the end enables the organization to control costs.
7. Budgeting is made easier: One of the greatest benefits of standard costing is to be found in setting budgets for the organization and its departments. As before illustrated one time the desired output units are identified, after that the budgeted cost is merely the output units desired multiplied via the standard cost per unit.
That is: Budgeted Cost = Output units x Standard Cost per unit
8. Performance Evaluation is simplified like already noted, standard costing creates a cost consciousness in the organization with that any cost can be easily evaluated whether it has favourable or un-favourable variance, hence appropriate corrective measures can be taken. Once budgets are prepared and agreed on anticipatively, and employee's performance can be acceptably measure against the set standards to verify whether the performance is acceptable or not: suitable corrective measures punishment or reward can then be acceptably taken through the management.