Free Essay On Standard Cost System

A standard cost is the amount that the management of a particular firm believes is the unit cost (Schneider, 2012). It consists of the price standard. The price standard is the price depending on the cost of materials, labor, and the rate of factory overhead. Standard cost also includes the quantity standard that involves the quantity of the materials, time of labor, and volume of factory overhead. The setting of standards of the prices and quantity entails the management judgment, engineering studies, work measurements, analysis of vendors, and union bargaining as well as others aspects. The standards are set on the basis of the unit quantity, time, activity, and unit product.

Advantages of Standards

Cost control: standards set are compared to the actual performances and the necessary adjustments made.
Cost management: Although this is related to cost controls, the standards lay down levels of costs that can act as benchmarks for performance.
Decision-making: the standards that a firm sets can serve as a basis for decision-making. For example, in cash planning, special orders, transfer planning, among others.
Recordkeeping costs: standard cost is a system that can help in keeping records for the long-term and save on record keeping costs.
Inventory valuation: the standard cost records same costs of all identical units, products, and hence reduces wastage due to duplication and inefficiency.

Disadvantages of standard cost system

The standard cost system is time-consuming, tedious, and expensive
It’s reactive in natures as opposed to being proactive
It has application limitations as it works only if the components and work elements are the same with a repetitive and consistent process, and where the products are homogeneous.
Therefore, the standard cost system is most effective if it is applied for homogenous products those are produced by a consistent and repetitive process.

Reference

Schneider A. (2012). Managerial Accounting: Decision Making for the Service and Manufacturing Sectors. Bridgepoint Education Inc. San Diego.