Despite its tremendous value to management, standard costing has obvious limitations and demerits. In fact, management can derive greater value from using this control technique if they are cognisant of its demerits in relation to the advantages.

== Pros ==

Decision-making aid

Standard costing is a control mechanism, but it is also a useful decision-making tool. Standard costs can enable price setting for the costs of projects when actual cost data is not available. Since standard costs can use historical data and environmental factors, standard costing can be a reliable decision-making aid.

Facilitates management by exception

Standard costing helps to focus management on critical issues concerning the production process or general business affairs. This is because it allows managers to intervene only when performance falls well outside the pre-defined parameters.

Simplifies bookkeeping

Recording actual costs can take a lot of time or it might be difficult to factor in immaterial changes in costs. Standard costing makes it easy to assign costs to jobs and other cost unit or objects. In addition, standard costing is a simpler way of valuing stock than FIFO or the weighted average cost method.

Performance incentive for individuals and departments

Apart from raising cost consciousness within an organisation, standard costing can provide incentives and be a source of motivation for individual employees. For this benefit to be realised, employees must willingly accept the performance standards outlined by this technique.

Facilitates responsibility accounting

In an organisation, someone has to be accountable for costs in a particular area. Standard costing establishes what costs should be, gives an idea of who is responsible for them and whether actual costs are acceptable.

== Cons ==

Potential conflict over standards

Conflict in setting or applying standards can come from managers and employees alike. Managers might disagree about whether to apply basic, current, attainable or ideal standards. Even if there is agreement there, then the way that these are measured are another source of debate. In addition, employees might resist the standards if they feel that they are unfair or do not account for the peculiar circumstances that they face.

Accounting for variations

Planned costs almost often differ from actual costs, owing to the dynamic nature of the business environment. Seasonal price fluctuations, availability of resources and inflation make it nigh on impossible to set accurate standards.

Behavioural problems and morale

Resistance to the use of this technique might come in the form of "gaming" the system to the detriment of quality, work-to-rule coming into effect and other forms of resistance to implementing new standards that are perceived as unfair or sinister.

Timeliness, relevance and cost

With variance reports, information that is not timely is not relevant. Given the time it takes to compile reports on actual costs, it is likely that when the information is complete, the information would be dated and less useful. In addition, variance reports take time and resources to produce. The catch is that a business would have to incur costs in producing such reports more frequently in order for them to be timely and thus more useful.

Favourable variances might be unfavourable

Generally, a favourable outcome occurs when the planned cost or usage is significantly higher than the actual cost or usage. However, the "favourable" outcome might be the result of using cheaper resources that ultimately affect the quality of the product. This is something to which managers should also pay attention. However, standard costing has a heavy emphasis on cost factors to the detriment of quality and other intangible but important attributes of the production process.

== Conclusion ==

Generally, the merits of standard costing tend to offset the demerits. However, in order for standard costing to have more value, both the pros and cons must be evaluated when selecting and measuring standards to be used as the premise.

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