Problems With Standard Costing Mechanism - Essay Example

Problems with Standard Costing Mechanism Based on the assigning of gross profits on standard costing and assigning of variances for budgeted against actual costs, it becomes difficult when any standard orders are not received. When the organization receives rush orders or orders where varying degrees of customization is required in a limited time period, it becomes difficult to assign a standard costing method because there will inevitably be a variance in the actual costs against the standards that have been budgeted.

In this case, it can be seen that due to a limited timeline given to the sales and production department, the department could not complete the order based on standard costing since there were significant labor cost variations that would then be assigned to the department’s budget. Labor also worked overtime which added to the costs of the department, leading to a production batch that was more expensive than other regular batches (Caplan, 2012). Recommendations for Change One of the key ways that most organizations use to manage their costing systems is to use a standard costing mechanism and use flexible budgeting in order to cater to such variations which are inevitable in such organizations where some orders may come in for rush production.

With flexible budgeting, the variations between actual and budgeted costs are utilized to evaluate futuristic trends and seasonable patterns. In this manner, the organization can use not only the same standard costing mechanisms but also flexible patterns in order to help predict how costs may vary in case of such nonstandard practices like overtime production, or production in shorter timelines (Caplan, 2012).ReferencesCaplan, D. (2012). Management Accounting: Concepts and Techniques.