Advantages And Disadvantages Of Standard Costing

Accounting , Business
Merits/Advantages Of Standard Costing

Main benefits or advantages of standard costing system can be expressed as follows:

1. Performance Evaluation

Standard costing is a management technique that estimates the cost of the product and makes comparison with actual cost of that product. So, it helps to measure the efficiency and performance of operation.

2. Wastage Minimization

Standard costing helps to reduce inefficiency and wastage of production process with the help of variance analysis.

3. Assists Management

Standard costing helps the management to perform various functions like planning, goal-setting, coordinating, budgeting, controlling and decision making.

4. Delegation Of Authority

Standard costing system ensures effective delegation of authority by setting the standard performance and assigning responsibility to the concerned person.

advantages disadvantages standard costing

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5. Stock Valuation

Stock valuation process becomes easier with the help of standard costing. Because stock or inventory is valued at predetermined (standard) costs.

6. Employee Motivation

Standard costing helps the management to prepare incentive schemes and bonus plan to encourage workers. It motivates the workers to do their job more effectively and efficiently and ensures better output.

Demerits/Disadvantages Of Standard Costing

Standard costing suffers from the following drawbacks or limitations:

1. Expensive And Time Consuming

It takes a lot of time and money to install and maintain standard costing system in the organization. It is a labor intensive and expensive costing system.

2. Suitability

Standard costing system is suitable only for big manufacturing firms with higher degree of skill and resources. It is not applicable for small scale business firms with lower volume of production.

3. Not Applicable For All Products

Fixing standard is impossible for non-standardized products. So, standard costing is not applicable for those manufacturing firms which produce non-standardized products.
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Advantages And Disadvantages Of Job Order Costing

Accounting , Business
Advantages Of Job Order Costing

Main benefits or advantages of job order costing system are as follows:

1. Cost Analysis 

Job order costing is a method of determining the expenses before producing a product. It thoroughly  analyze materials costs, wages and overheads costs of different departments and production units on the basis of their nature and functions.

2. Cost Control

Job order costing maintains accurate cost record of different departments and units. It helps to compare actual costs with estimated costs and facilitates cost control.

3. Profitability

Job order costing helps to know the profitability of each job separately. It helps the management to identify the most profitable job.

4. Cost Estimation

It helps the management to estimate the cost of similar job by providing past cost details.

5. Proper Evaluation

Job order costing helps to evaluate the performance, efficiency and profitability of different jobs separately which assists the management to identify the most favorable or unfavorable job.

advantages disadvantages job order costing

Disadvantages Of Job Order Costing

Main drawbacks or disadvantages of job order costing can be expressed as follows.

1. Complex System

Job order costing consumes more time and procedure to maintain detailed information about the job. It also requires more clerical works to record material costs, labor costs and overheads charges. So, it is a complex method of costing.

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2. Expensive System

Job order costing is expensive because of various paper works and procedures for maintaining records of different jobs.

3. Strict Supervision Needed

Strict supervision is required to practice job order costing due to the lack of standardization of jobs.

4. Unsuitable For All Jobs

Job order costing is not suitable for those jobs which require high cost of production and take more time to complete.
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Advantages And Disadvantages Of Activity Based Costing

Accounting , Business
Benefits Or Advantages Of Activity-Based Costing (ABC)

Main benefits or advantages of activity based costing can be studied as follows:

1. It Is Scientific System

Activity based costing is scientific and modern method of costing which is developed to overcome the weakness of other methods of traditional costing.

2. It Is Suitable For Large Firms

Activity based costing system is very suitable for large manufacturing concerns with large volume of production and adopting modern technology.

3. Accurate Cost Determination

Activity based costing helps to determine accurate product cost by showing relationship between different activities and costs.

4. Fixation Of Price

Activity based costing helps to fix fair selling price of the product by determining accurate cost of production per unit.

5. Quality Decision Making

Activity based costing helps the management to make decisions, future planning and forecasting by providing information and quantifiable figures.

advantages disadvantages activity based costing

Drawbacks Or Disadvantages Of Activity-Based Costing (ABC)

Main drawbacks or disadvantages of activity based costing system can be studied as follows:

1. Not Suitable For Small Firms

Activity based costing is suitable only for large manufacturing concerns. It is not applicable for small firms with limited volume of production.

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2. Complex System

Activity based costing is a complex system which needs substantial resources to collect information and data. It is time consuming and expensive to implement.

3. Difficult To Allocate Cost

It is very difficult to identify the activities, determine the cost and allocate the cost to each activities.
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Advantages Of Just-In-Time Inventory System

Accounting , Business
Main benefits or advantages of just-in-time inventory system can be expressed as follows:

1. Reduce Liquidity Problem

Just-in-time inventory system helps to reduce inventory costs of the company. It minimizes the money tied up in inventory of raw materials, work-in-progress and finished goods. So, it helps to reduce the liquidity problem of the firm.

2. Less Storage Space

Just-in-time inventory system does not need large storage space and warehouse because of faster turnaround of inventory. 

3. Suitability

Just in time inventory system is suitable for all types of business organization. All business organizations (producers, suppliers, distributors, assemblers, wholesalers etc.) can apply this system of inventory. It is applicable for both big and small scale business houses.
advantages just-in-time inventory
4. Wastage Minimization

Just in time inventory system gives emphasis on zero waste. It prevents investment in unnecessary inventory of materials and finished goods. It helps to minimize wastage by maintaining minimum stock level.

5. Investment Opportunity

Just in time inventory helps to minimize inventory costs such as materials handling cost, storage cost and staff cost. Company can invest this saving in other profitable opportunities.

6. Minimize Unfavorable Variances

Just in time inventory system helps to eliminate material price variances and unfavorable overhead spending variances.

7. Quality Control

As just in time system gives emphasis on perfect quality of work, It is easy to spot production mistakes and quality problems very quickly. So, appropriate corrective actions can be taken on time.

       Also Read: Advantages Of Perpetual Inventory

8. Constant Production

Just-in-time system avoids over and under production by supplying only needed amount of materials and components consistently to meet the actual market requirement. It ensures constant production.
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Disadvantages Of Management Accounting

Accounting , Finance
Major drawbacks or limitations of management accounting can be expressed as follows:

1. Lack Of Specific Procedure

Management accounting does not follow specific accounting rules, procedure and techniques. So, it fails to provide accurate information and data in the lack of proper principles.

2. Uncertainty

Management accounting is futuristic in nature, so it provides data and information for the purpose of future planning, decision making, forecasting, and decision making. Since future is uncertain, its plans and policies may not bring expected results. 

3. Dependency

Management accounting is practiced on the basis of data and information received from cost and financial accounting. So, its accuracy and reliability depends on the effectiveness of cost accounting and financial accounting system. 

4. Costly System

Management accounting is very expensive system to install and practice. Low budget business houses cannot afford to install it.

disadvantages management accounting

5. Interdisciplinary knowledge

Management accounting draws from a number of disciplines such as cost accounting, financial accounting, statistics, economics, science etc. So, a single employee (accountant) may not possess interdisciplinary knowledge to maintain management accounting system.

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6. Only A Tool

Management accounting is only a tool to provide data and information to the management. It is not the alternative of management and cannot make any decision.

7. Personal Bias

Management accounting may be affected by the personal interpretation and bias of the top manager. Decisions may be influenced by personal prejudices of an individual.
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Advantages Of Management Accounting

Accounting , Finance
Main benefits or advantages of management accounting can be expressed as follows:

1. Focus On Future

Management accounting always focuses on the future of the business . It provides information and guides the top level management in planning and policy making process of the firm. So it is future oriented and progressive type of system.

2. Decision Making

Management accounting helps to take both short-term and long-term business decisions. It provides up-to-date information to make suitable decisions. So, management accounting ensures the effectiveness of decision making.

3. Optimum Use Of Resources

Management accounting helps to ensure optimum utilization of resources by collecting the information and reporting to the top level management. 

4. Effective Control

Management accounting compares actual performance of the business with the standards and budgeted targets. It help to check variations and take appropriate step to make controlling system more effective.
 
advantages management accounting

5. Performance Evaluation

Management accounting helps to evaluate the performance of different divisions, units, departments and centers of the company by measuring their performance and reporting the data and information to the owner.

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6. Coordination

Management accounting helps to maintain proper coordination between different units, departments, divisions and employees in order to achieve the goals of the business firm.

7. Flexibility

Flexibility is another key benefit of management accounting. It can be prepared or practiced any time when required by the management. 

8. Improves Efficiency

Management accounting helps to improve the efficiency of the firm by eliminating wastage in production process. It helps to improve employees' efficiency by motivating them and maintaining higher degree of morale. 
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