a) Outline the advantages of standard costing

1. More accurate pricing of products based on detailed cost analysis.
2. Carefully planned standards are an aid to more accurate budgeting.
3. The business will have a more simplified stock control system, as all materials purchased are valued at standard cost rather than LIFO or FIFO value systems.
4. More detailed variance analysis leading to a deeper level of investigation and better management decision-making.
5. A target of efficiency is set for employees and cost consciousness is stimulated.
6. The setting of standards involves determining the best materials and practices, which may lead to economies.
7. An overall improvement in the financial control of the business.

b) Briefly outline the problems involved in setting standards

1. Standards should be attainable and should not assume perfect or ideal conditions. This would lead to unrealistic standards and large adverse variances as well as demoralised staff. This can happen when standards are set from the top down in an autocratic styled organisation.
2. Built into any standard should be certain allowances for what is termed 'normal loss'. This could include factors such as machine breakdowns and unavoidable material wastage.
3. Standards, although realistic and with allowances built in, should also have a motivating affect on employees. In performing different tasks, different employees will have different levels of ability and motivation. If standards are perceived to be unfair then employees may be unmotivated to achieve the standard.
4. Employees must be involved in the standard setting process where it affects them, especially in terms of the efficiency standards. This can ensure a fairer and more motivating standard is set.
5. In setting standards, management must accept and anticipate some degree of variability between actual performance and the standard set. These variations or variances can be positive or negative, however what is important is the degree of variation or variance. This will dictate the level and extent of investigations. For example should a variance be only 1 per cent of the standard, then it may be ignored. However with extremely large positive or negative variances, it should be asked whether standards were set either too high or too low. Also management must be aware that departments can show extremely large positive variances by cutting training or research budgets which might affect the long-term profitability of the business.
6. Standards have to be revised, especially if the level of variance is extreme, as this would indicate the standard is meaningless. Also should there be any change in work practices, materials used, materials cost or wage rates, then standards need to be adjusted. Ideally, any revisions should take place when the business is preparing its annual budget.