Organizations that evaluate performance based solely on the comparison of current results with actual results of previous accounting periods will likely encounter problems first and foremost because of the limited scope these metrics provide.
While standard costing is an important financial tool, it primarily focuses on dimensional profitability and lacks the ability of providing insight with regards to improved performance and competitiveness.
Countless establishments compare present outcomes with the actual outcomes of preceding accounting periods. A business that follows this method is likely to come across some difficulties if they do not remain flexible. Standard costing advantages include cost consciousness, process efficiency, targeted management, and price flexibility.
Many organizations compare current results with the actual results of previous accounting periods. An organization that follows this approach is likely to encounter some problems if they do not remain flexible.
Standard costing advantages include cost consciousness, process efficiency, targeted management, and price flexibility. Some problems that could arise are limitations of application, resource utilization, and reactive decisions from management. Standard costing offers limitations of application, which can best be illustrated in companies that do not offer customizable products.
Reactive decisions from management in a standard costing environment make rash decisions, rather than a thought-out proactive reflection of each specific situation. Resource utilization does not take into account business plan costs due to inflation, or the increase of the company’s costs