Explain the advantages and disadvantages of standard costing (10 marks)

ADVANTAGES Standard costing is not only useful for cost control purposes; it is also helpful in production planning and policy formulation. It allows Management by Exception.

MEASURING EFFICIENCY: Standard costing is a yardstick for reassuring efficiency. The comparison of actual cost with standard costs enables the management to evaluate performance of various costsCentres. In the absence of standard costing system actual cost of different periods may be compared to measure efficiency.

FORMULATION OF PRODUCTION AND PRICE POLICY: Standard costing is helpful in formulating production policies. The standards are set by studying all existing conditions. It becomes easy to formulate production plans by taking into account Standard costs.

DETERMINATION OF VARIANCE: By comparing actual cost with standard cost and variance are determined management is able to spot out the place of inefficiencies. It can fix responsibility for deviation in performance it is possible to take corrective measure at the earliest.

REDUCTION OF WORK: In historical costing, records are maintained for determining the costs. Standard costing reduces clerical work to a considerable extent and managemen is supplied with t

useful information. In this system only necessary information will be recorded and superfluousdata are avoided.

MANAGEMENT BY EXCEPTION: With the use of standard costing, the targets of different individuals are fixed. If the performance is accounting to predetermined standard then there is nothing to worry. FACILITATES COST CONTROL: Every costing systems aims at cost control and cost reduction,.Standard costing helps in achieving these aims. The standards are being constantly analyzed and an effort is made to improve efficiency.

ELIMINATING INEFFICIENCIES: The setting of standard for different elements of cost requires a detailed study of different aspects. The standards are differently set for manufacturing administrative and setting expenses.

HELPFUL IN TAKING IMPORTANT DECISIONS Standard costing provides useful information to the management in taking important decisions. The problem created by inflation, rising prices etc. can be effectively tackles with the help of standard costing.

DISADVANTAGES

HEAVY COST: Fixation of standards may be costly and may require high order skill and competence, small concerns, therefore fed efficiently in the operation of full systems.

FREQUENT REVISION REQUIRED: Standards once fixed, if not reviewed and revised from time to time, tend to become rigid and incapable of being effectively and efficiently used. Revision of standards is a tedious and costly process. Some firms, therefore simply ignore this aspect.

UNSUITABLE FOR NON-STANDARDIZED PRODUCTS: The industries which deal with non-standardized products and jobs, which change according to customers specifications, may find the system of standard costs unsuitable and costly.

FIXATION OF RESPONSIBILITY DIFFICULT: Responsibility can be developed upon a particular person, process or production department only when the controllable and non-controllable factors are distinctly known ans this is very hard nut to crack.

ADVERSE PSYCHOLOGY EFFECTS: Standards may create sometimes adverse psychological effects. Standards may be fixed at a high level. They may not be achieved resulting in frustration as well as building up of resistance

USERS RESENTMENTS: Managers and others, who have to use the system, often resent because they see it as a threat to their freedom of action.

2 Marks

1. Give Marginal Cost equation: The marginal cost equation is very useful in the sense that if any three factors out of the four are known, the fourth can easily be found out. For the sake of convenience, a marginal cost equation can be derived as follows: Contribution= sales- variable cost Sales= variable cost + contribution Sales = variable cost + fixed cost Profit/ Loss Sales-variance cost = Fixed cost profit/ loss SV=FP S stands for sales V stands for variable cost F stands for fixed cost P stands for profit/ loss

2. What is BEP? The BEP stands for Break- Even point. It may be defined as the point of sales volume at which total revenue is equal to total cost. It is a point of no profit, no loss. A business is said to break-even when its total sales are equal to its totalcosts. The break-even point refers to that level of output which evenly breaks the costs and revenues

3. Define Angle of incidents. The Angle of incidence is the angle between the sales line and the total cost line formed at the break-even point, where the sales line and the total cost line intersects each other. The Angle of incidence indicates the profit earing capacity of a business. A large angle of incidence indicates a high rate of profit and on the other hand, a small angle of incidence and margin of safety are considered together to indicate the soundness of business. A large angle of incidence with a high margin of safety indicates most favorableposition of a business.

4. Define Cost sheet. Cost sheet is a document which provides for the assembly of the estimated detailed cost in respect of a cost Centre on a cost unit. It is a detailed statement of the elements of cost arranged ina logical order under different heads. It is prepared to show the detailed cost of the total output for a certain period. Additional columns can be provided to indicate cost per unit at different stages of production or to enable comparison to be made of the current costs with that of historical costs

By L. KeerthiSagar. (10MBA25) Ponmanipriya (10MBA37)