Nov 2015 Q1 a,b&c

This represents constant standard that are unchanged over long period. The main advantage of basic standard is that a base is provided for comparison with actual cost through a period of years with the same standard and efficiency trends can be established over time. When changes occur in the method of production, price levels or other relevant factors, basic standards are not very useful since they do not represent current target.

This represent perfect performance. Ideal standards are minimum cost that are possible under the most efficient operating condition. They are unlikely to be used because they may have negative impact on employee performance.

This standard represent those cost that should be incurred under efficient operating conditions. They are difficult but not impossible to achieve. Allowance are made for normal spoilage, machine breakdowns and idle cost.

i) Prediction of future cost that can be used for decision making.
ii) Provide a challenging target that can serve as a motivation for employee.
iii) Assist in setting target.
iv) Act as control device by highlighting exceptions
v) Simplifying the task of tracing cost to product for measuring profitability and inventory valuation.

i) Variance analysis concentrates on only a narrow range of costs, and does not give sufficient attention to issues such as quality and customer satisfaction.
ii) Standard costing pays too much emphasis on direct labour cost. Direct labour is only a small proportion of cost in modern manufacturing environment and so this emphasis is not appropriate.
iii) Many of the variances in standard costing system focus on the control of short term variable costs. In modern manufacturing environment majority of cost including direct labour cost tends to be fixed in the short run.
iv) The use of standard costing relies on existence of repetitive operations and relatively homogeneous output. Nowadays many Organisation are forced continually to respond to customers’ changing requirement, with the result that output and operations are not so repetitive.
v) Standard costing system were developed when the business environment was more stable and less prone to change. The current business environment is more dynamic and it is not possible to assume stable conditions.
vi) Standard costing system assumes that performance to standard is acceptable. Today’s business environment is more focused on continuous improvement.
vii) Most standard costing systems produce control statements weekly or monthly. The modern manager needs much more prompt control information in order to function efficiently in a dynamic business environment.                     (Any 4 points)