This video highlights several disadvantages of standard costing.
With standard costing, top management creates standards to which it compares the company’s operating performance. While this enables executives to perform variance analysis, it the process can be of little use if the process of creating the standards becomes political, with certain managers using their influence to have easily achievable standards set.
Another issue is that there is a time lag from the time a variance occurs until the time it is detected, since variance analysis isn’t performed until sometime after the period has ended. Furthermore, variance analysis does not identify the root cause of the problem– a large variance simply serves as a red flag to prompt top-level management to investigate.
In some situations variances can be misleading. A favorable quantity variance might suggest the company is using too little material to create the product, which could reduce the product’s quality and make customers unhappy. At all times, it should be remembered that the goal of the company is to make money, not to strictly focus on variances. A short-sighted focus on variances could distort managers’ incentives; for example, a manager might purchase a lower-quality raw material just to achieve a favorable price variance, which could lead to unhappy customers if the final product does not meet their expectations with respect to quality.