- 5 Marks
Question
b) Explain THREE (3) advantages and TWO (2) disadvantages of standard costing.
Answer
Advantages of Standard Costing:
- Improved Cost Control: Standard costing enables better cost control by setting predefined cost standards and highlighting variances, which helps in identifying areas that require managerial attention.
- Enhanced Planning and Decision Making: It provides a basis for budgeting and helps in forecasting future costs, making it easier for management to plan and make informed decisions.
- Simplified Inventory Valuation: Standard costing simplifies inventory valuation by applying standard costs to inventory, avoiding the need to calculate varying actual costs for each unit, which can be complex and time-consuming.
Disadvantages of Standard Costing:
- Controversial Materiality Limits for Variances: Determining materiality limits for variances can be subjective and may lead to disagreements. The judgment involved in setting these limits can create inconsistencies in reporting.
- Potential for Low Morale: The focus on unfavorable variances can demotivate employees if their good performance is not equally recognized, leading to potential issues with morale.
- Tags: Cost Management, Standard Costing, Variance Analysis
- Level: Level 2
- Topic: Standard Costing and Variance Analysis
- Series: NOV 2020
- Uploader: Dotse