Standard costing is managerial control technique that facilitates a comparison of standard cost and revenue with actual results to obtain variance that are used to stimulate improved performance.
The following are advantages of standard costing:
- It provides yard stick against which actual are measured.
- It helps in valuing the closing stock.
- It helps in fixing selling prices in advance of production thus quotation can be sent and orders secured.
- It helps in introducing incentives to employees and provide the basis of motivating them.
- It simplifies accounting procedures which involves less clerical works and time.
- It enables periodic preparation of profit and loss account which helps management in knowing the trend of the business.
- It pinpoints the responsibility of everybody concerned in the organization.
- It facilitates cost control by analysing the causes of inefficiency and by taking remedial measures. This will result in the reduced cost of production.
- Standard costing helps in standardizing the various activities of the business. Thus, it enables use of standard materials and better method of production.
- Standard costing increase cost consciousness among all concerned by fixing target and how to achieve them.
- Standard costing follow the principle of management by exception. Management by exception means that everybody is given a target to be achieved and management need not supervise each and everything. The responsibilities are fixed and every body tries to achieve his targets. If the things are going as per targets then the management needs not to bother. Management devotes its time to other important things. So, management by exception is possible only when targets of work can be fixed. Standard costing enables the determination of targets.
- Reduction of Work: In this system, management is supplied with useful information and necessary information is recorded and redundant data are avoided. The report presentation is simplified and only required information is presented in such a form that management is able to interpret the information easily and usefully. Therefore, standard costing reduces clerical work to a considerable extent