Standard costing is one of the most commonly used costing systems in the world of management accounting. When you consider all of the advantages that standard costing has got to offer, you’ve got to say that the preference appears to be well justified. Here are some of the proven advantages that standard costing has got to offer to your business:
You know what they say about controlling costs, right? The lower your costs are, the higher your profits will be. Standard costing requires for you to set standard costs against which actual costs can be compared. If the variation in actual costs (compared to standard costs) is found to be remediable, it makes it easier for the management of the business to take corrective action. The better an organization is able to control its costs, the easier it will be for it to improve its profit margin. For that to happen, however, it’s essential for the standard costs to be up to date, embodying all of the latest developments. Only then will the comparison with the actual costs be valid.
The employment of standard costing makes it easier for a business to formulate policies and determine the prices. This is one of the biggest advantages of standard costing, considering that it allows for the formulation of budgets and projections. Making estimates, through standard costing, in the pre-manufacturing phase, for example, can give the management a fair idea of whether the manufacturing will be beneficial for the business or not.
Efficiency is among the essential keys of success for any business, right? Yet, few businesses are able to achieve it. With standard costing, however, a business can be made more efficient over the course of time. How? Well, a thorough investigation conducted for the variation between standard and actual costs often brings into light operational and manufacturing inefficiencies within the business. The management then has the opportunity to take the corrective actions required for promoting efficiency within the organization. Over time, such procedure can lead to the determination and eradication of quite a few inefficiencies.
Better Decision Making
Ultimately, the basic purpose of standard costing is to aid the management of any business in making more informed decisions. Standard costing provides employees targets that are needed to be met. If the employees are unable to meet their targets—or in some extreme conditions—is the management required to interfere. Such a procedure ensures that the management is able to direct its energy towards such departments and segments of the business that REQUIRES its attention. Let’s face it: most employees are annoyed by undue attention from the management. Standard costing, thus, is able to make life easier for the management and employees alike. Standard costing also serves as an evaluation for the performance of the employees and is, often, the basis of bonuses and terminations!
Standard costing has got its advantages, no doubt, but there’s no guarantee if it’s the RIGHT system for your business. Therefore, to facilitate your choice in the perfect accounting system for your business, SKB Accounting has got all of the required expertise!