Disadvantages of standard costing, Cost Accounting

Disadvantages of Standard Costing

1. The system of standard costing is very expensive to install: A lot of money is spent in studying output requirements in terms of materials, labour and overheads.

2. Time Consuming: A lot of time is spent also installing and developing reliable standard costing systems.

3. Obsolescence:  In fast changing conditions as an example: in-hyperinflationary economies whereas prices of materials, labour and overheads change rapidly, standards become out of date quickly. Therefore they lose their motivational and control effects.

4. Hard to Understand: several standard costing systems are overly elaborate and are hence not well understood via line managers and employees. It makes their implementation difficult.

5. Effectiveness depends on Environment:  For standard costing systems to be effective in performance evaluation and cost control, then a democratic and participative management style is essential. The employees and top management need to be committed to attaining the set standards of performance. An efficient and effective management information system is essential also so as to give employees and managers along with reliable, exact and timely feedback regarding their performance. Lack of one or more of these needs frustrates the success of a standard costing system hence its effectiveness cannot be realized.

6. This is Subjective:  As we have already distinguishes, there are different types of standards that an organization can adopt ideal, basic, and attainable and cement. Therefore what is a standard in an organization depends on its management. It is significant to note also that what is referred to like a important variance depends on the organization's management, consequently the subjectivity. If this subjectivity is poorly managed, as an example: punishing employees for insignificant unfavourable variances of for variances arising from factors beyond their control, after that a standard costing system can lead to employee frustration and poor goal congruence in the organization.

Posted Date: 2/7/2013 5:57:37 AM | Location : United States

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