Standard costing is a valuable control technique that helps management to improve performance and efficiency in production. While there are several benefits of using this technique, there are attendant demerits that must be considered when using this control mechanism. These include limitations of the model itself, disagreement over how it should be used and the potential effect on the workplace.

Disagreement over suitable performance benchmarks and resources

In using standard costing, management must decide which of four primary standards they would utilize as a benchmark. Since management can use the basic, ideal, current or attainable standard, there could be discord over which is most appropriate. Another point of contention would concern the costs/resources relationship. For example, resources that are more expensive would raise expected costs but might improve quality or reduce wastage. Deciding on this trade-off can be problematic as well.

Accounting for variations

In a dynamic, complex business environment, it is easy to understand how an expected cost is difficult to establish. There might be seasonal variations in the prices of direct materials; the influence of inflation might be difficult to impute and factoring the impact of trade discounts might not be prudent or practical.

Behavioural problems and morale

Sometimes, adherence to standards can cause problems if managers do not use it properly. For example, if a variance is unfavourable, some managers might assume that it is a result of lack of effort or efficiency on the part of employees, when it could be another reason. One aspect of using the standards associated with this technique is that employees might try to "game" the system such that quality might suffer in favour of production. Work-to-rule and resistance are other problems associated with the introduction of standard costing.

Timeliness

Management information is useful when it is timely. Variance reports can take a long time to process, which can significantly reduce the value of the standard costing information. Timeliness is a major problem because variance analysis would be easier to perform once the business environment is similar. Trying to get actual cost data too accurate can stall the reports. To avoid this disadvantage, standard cost variance reports should be more frequent and without unnecessary detail.

Time and cost

Standard costing can be a costly and time-consuming technique. Setting standards, implementing a system to maintain standards and incorporating various forms of measurement can use significant resources - particularly time.

Assumptions of the significance of labour

Direct labour is a significant aspect of standard costing. This control technique assumes that the more efficient labour is, the more output would be produced. However, a production process that is heavily reliant on other factors, like supplies or machine processing belies this assumption. In standard costing, labour is usually treated as variable, when it can be fixed or semi-variable. The fixed component of labour is sometimes ignored when using this technique.

Favourable variances might be unfavourable

Just because the costs and resources used in production are less than expected costs should not automatically mean that a variance is favourable - although that is the definition. A favourable variance could mean that some aspect of quality was compromised in making the product or providing the service. The inability of standard costing to account for quality and other intangibles properly is a limitation of the technique that must be overcome by careful, multivariate analysis of variances.

While standard costing has several demerits, some of these can be overcome or mitigated by exercising prudence in the use of this technique, and acknowledging its limitations.

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