Discuss the shortcomings of standard costing systems in a modern manufacturing environment
They are the direct labour rate variance and the direct labour efficiency variance.
Limitations of standard costing
The direct labour rate variance is related to differences between the standard hourly labour rate and the actual hourly labour rate. Current standard: When the standard of performance is not challenging e. Since standards are not perfect, it is not expected that actual outcomes will perfectly match standards. The first limitation is regarding the predetermined nature of standard costs. A cost manager may use a standard costing system in that way. A variance is more likely to be investigated if a cost manager believes it is controllable. If a variance occurs on a regular basis, it could either mean that a process is out of control, or it could mean that the standard has been misestimated. The goal is to reduce actual costs from the current year in the coming year. When materials are sent to production, they are scanned as they leave the raw materials inventory warehouse, and are automatically deducted from raw materials inventory.
Nonreporting of certain variances. Standards are set, and actual performance is measured and then compared to the standard. The direct material quantity variance is based on the actual quantity of materials used to make the actual number of units produced.
Management by exception requires that managers look only at variances that are significant. Instead, companies may print standard cost sheets in advance showing standard quantities and standard unit costs for the materials, labor, and overhead needed to produce a certain product.
When actual production occurs, the amount of cost assigned to the units is assigned based on standards.
This is especially useful when parts of the production process are changed.
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