Standard costing is a managerial control technique that facilitates the comparison of standard cost and revenue with actual results to get variance that is used to stimulate improved performance.
The following are the limitation of standard costing:
- The fixing of responsibility is not a straightforward task. The variances are to be classified into controllable and uncontrollable variances. The responsibility can be fixed only for controllable variances, not in the case of uncontrollable.
- The time and motion study is required to be undertaken for the process of setting up standards. These studies require a lot of time and money. Further, the process of setting up standards is a difficult task, as it requires technical skills
- This system is expensive and small concerns may not afford to bear the cost. For small concerns, the utility from this system may be less than the cost involved in it.
- Standard costing was developed in the environment of predominantly mass production and repetitive assembly work. Therefore, it is not particularly useful in today’s growing service sector of the economy.
- The standard costing system assumes that performance to standard is acceptable. Today’s business environment is more focused on continuous improvement
- The standard costing system was 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 a stable environment
- Precise estimation of prices and rates used in standard costing is difficult.
- Standard costing focuses on cost minimization rather than quality and innovation
- Standard costing is too comprehensive and therefore time-consuming