Traditional standard costing

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.

One of the first authors to foresee standard costing was the British accountant George P. Norton in his 1889 Textile Manufacturers' Bookkeeping.John Whitmore, a disciple of Alexander Hamilton Church, is credited for actually presenting "the first detailed description of a standard cost system" in 1906/08. The Anglo-American management consultant G. Charter Harrison is credited for designing one of the earliest known complete standard cost systems in the early 1910s.

...
Wikipedia