Cost Standards – Pros and Cons
Posted on | May 24, 2010 | No Comments
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In spite of tremendous value to the standard cost management are clear limitations and drawbacks. In fact, management may become more valuable through the use of control when they are aware of the disadvantages in relation to profits.
== == Professionals
Aid decision making
Standard cost control mechanism, but also a useful tool for decision-making. Standard costs can be set to activate the price of the project cost, if actual cost data is not available. Since the standard cost may be used for historical data, and environmental factors, standard costing in decision-making tool can be reliable.
Facilitate management by exception
Standard costing helps management focus on the important issues of the production process and business in general. This is because it allows managers to intervene only if the performance well beyond the parameters already defined.
Simplify accounting
Record actual costs may take a long time or it may be difficult to factor price changes are not essential. Standard unit cost of a simple fixed costs and other expenses, or job site. In addition to standard cost is a simple way to assess the shares of the FIFO method or weighted average cost.
Performance incentives for individuals and departments
In addition to raising awareness of the expenditures, the cost of a standard can provide a source of motivation and incentives for the individual employee. These benefits can be realized, employees must accept the voluntary performance standards are described in the above-mentioned data processing system.
Facilitation of financial responsibility
Order, someone must be responsible for costs in certain areas. Setting the standard cost, the cost should be, I will give you an idea, which is responsible for them, and whether the actual costs are acceptable.
== Cons ==
Conflict standards
Standards setting or conflict may come from the leaders and workers. Managers may not agree on whether to apply the basic, current, or the ideal standard can be achieved. Even if there is an agreement in place, how it is measured at the source of debate. In addition, employees may reject a standard if they feel that they are not honest, or does not explain the strange circumstances that they face.
Accounting fluctuations
Plan cost is different from the actual cost is often almost as the dynamic nature of the business environment. the existence of seasonal price fluctuations and inflation is almost impossible to define precise standards.
Behavior problems and moral
Resistance to using this method may come in the form of “gaming” the system to sacrifice the quality of the work-to-enforce rules and forms of resistance against the new standards, which are considered unfair and wrong.
Timeliness, relevance and cost
What’s the difference between reporting timely information that is not appropriate. Given the time required to prepare accounts in accordance with actual costs, there is a possibility that if the information is complete, the information is dated and less useful. In addition to reporting variances of time and resources for the production. The catch is that companies must pay for producing these reports more frequently, that they have a good time, and therefore more useful.
Differences may be less favorable
Generally favorable results occur when the cost of the proposed use or a lot more than the actual costs or use. However, the “benefits” may be due to the use of cheaper resources that ultimately affect product quality. This is something that is also the manager should pay attention. But considering the cost of standard cost factors at the expense of emphasis on the quality and attributes of other intangible, but important process.
== Summary ==
Overall, the benefits of standard costs tend to offset the disadvantages. However, the standard fee, to get more value, both pros, and cons, and choosing to be assessed by measuring the standards used as a prerequisite.
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