This video highlights several advantages of standard costing.

With standard costing, top management creates standards to which it compares the company’s operating performance. These standards allow variance analysis to be performed. Standards serve as benchmarks for managers and, when variances occur, these can serve as red flags for upper-level managers. Executives can quickly identify problem areas (e.g., a large unfavorable variance) and investigate to determine whether corrective action is necessary (this is known as “management by exception”).