Standard cost methods of inventory valuation

Cost/Management Accounting notes

Under this method, all issues are valued at a predetermined standard price which may not be the same as the actual price paid for the materials delivered. The standard price is based on management’s estimate of the expected costs. Where the standard price and the actual price are different, a material price variance occurs.
Advantages of standard costing
All issues are made at the same price hence makes it easy to compare. It is easy and less tedious since it does not involve recalculation of prices at different stages. In addition, it acts as a standard, which can be used for management control reporting.
Disadvantages of standard costing
Determination of standards can be difficult and time consuming. It involves a lot of analysis. Issues may not be at current market value. In addition, where the price paid is different from the standard price, a variance will arise which calls for further analysis in order to determine the cause of the variance. Problems of inflation are difficult to manage especially where inflation rates change very often.

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