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State the advantages of using standard costs in the manufacturing industry.

      

State the advantages of using standard costs in the manufacturing industry.

  

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Martin
State advantages of using standards costs in the manufacturing industry

1. Effective cost control: The most important advantage of standard costing is that it facilities the control of cost. Control is exercised by comparing actual performance with standards and taking corrective action.

2. Helps in Planning: Establishing standards is a very useful exercise in business planning which instills in the management a habit of thinking in advance.

3. Provides incentives: The standards provide incentives and motivate to work with greater effort. This increases efficiency and productivity.

4. Fixing prices and formulating policies: Standard costs are a valuable aid to management in determining prices and formulating production policies.

5. Facilitates delegation of authority: Delegation of authority and fixing responsibility for performance may be identified directly with the persons concerned.

6. Facilitates Co-ordination: While establishing standards, the performance of different departments such as production, sales, purchases etc is taken into account. Thus through the working of standard cost system, co-ordination of various functions is achieved.

7. Cost Reduction: By fixing standards, certain inefficiencies are reduced, such as material wastage, idle time, lost machine hours, etc.

8. Valuation of stocks: Standard costing simplifies the valuation of stock because the stock is valued at standard cost.

9. Management by exception: Reporting of variance is based on the principle of management by exception. Only variances beyond a predetermined limit may be considered by the management for corrective action. This also reduces the cost of preparing reports.

10. Economical and simple: Standard costing is an economical and simple means of cost accounting and generally results in a saving in the cost of costing system.


Other advantages of standard costing are:-
i) Standard costs are used to prepare the budget. The quantities to be produced or sold are multiplied by standard cost per unit and standard selling price per unit to find out the cost and sales. It helps to prepare budget accurately.

ii) Actual results are compared with standard or predetermined figures. If the actual costs are higher than standard cost, it shows unfavourable trend and vice versa. It can be determined whether the actual performance is satisfactory or not.

iii) When the variances are analyzed, the causes of these variances can be determined. If these variances are due to inefficiency of some employees then the disciplinary action can be taken against them. This procedure helps to improve the overall performance of the organization.

iv) Only the variances which exceed acceptable tolerance limits need to be investigated by management with a view to control action. In this way, the principle of “management by exception” is operated.

v) Standard costs can provide a valuable aid to management in determining prices and formulating policies. However, great care must be taken in this regard.
marto answered the question on February 26, 2019 at 08:06


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