Standard cost
accounting
is a traditional cost accounting method introduced in the 1920s, as an
alternative for the traditional cost accounting method based on historical
costs.
Standard cost accounting uses ratios
called efficiencies that compare the labor and materials actually used to
produce a good with those that the same goods would have required under
"standard" conditions. As long as actual and standard conditions are
similar, few problems arise. Unfortunately, standard cost accounting methods
developed about 100 years ago, when labor comprised the most important cost of
manufactured goods. Standard methods continue to emphasize labor efficiency
even though that resource now constitutes a (very) small part of the cost in
most cases.
Standard cost accounting can hurt
managers, workers, and firms in several ways. For example, a policy decision to
increase inventory can harm a manufacturing manager's performance evaluation.
Increasing inventory requires increased production, which means that processes
must operate at higher rates. When (not if) something goes wrong, the process
takes longer and uses more than the standard labor time. The manager appears
responsible for the excess, even though s/he has no control over the production
requirement or the problem.
In adverse economic times, firms use
the same efficiencies to downsize, right size, or otherwise reduce their labor
force. Workers laid off, under those circumstances, have even less control over
excess inventory and cost efficiencies than their managers.
Many financial and cost accountants
have agreed for many years on the desirability of replacing standard cost
accounting. They have not, however, found a successor.
