Standard Costing- Types of Standards

Types of Standards:

         Classification of standards is done in the following categories based upon period of operation, tightness & looseness:

Based on period of operations:

          (1) Current Standard.
          (2) Basic Standards.
          (3) Normal Standards.

Based on Tightness & Looseness:

          (4) Ideal Standards.
          (5) Expected or attainable standards.

1. Current Standards: The establishment of current standards is done for giving specific regard to current conditions, in which use of standards are made. The main features of current standard are:  (a) under current conditions, these standards outline what should be the cost; (b) these standards call or make frequent revisions & periodical review; (c) with changes in production method & price level, these standards are required to be changed; (d) for related period of accounting, these standards hold good. It is easier to understand these standards which for the purpose of managerial control have proved most useful. The use of the current standards has two main advantages:
   
   (i) For short periods, definite goals are provided by these standards, which can be expected to reach easily by employees. For the purpose of measurement of current performances, these standards appear to be fair bases. Current standards are set at a high level which can be attained if reasonably diligent efforts & attention is put to the correct method of doing the job. For the purpose of stimulating efficiency these standards may be effective.
   (ii) As expected actual performance is closely represented by current standards, it’s economical to use the same. In the processes of planning, budgeting & control, such attainable standards can be used. Current standards which are not close to expected actual performance may be applicable for the purpose of control but for the purpose of planning & budgeting use, they are not realistic.
   
   
2.  Basic Standards: These are also called by different names, like fixed standard, static standard etc. The main features of basic standard are: (a) for an unaltered use for a long period of time, these standards are established; (b) with same base line consistent comparison is allowed by these standards; (c) with current conditions these standards may not stand in harmony; (d) level of efficiency required are not specified; (e) special class of standards of a statistical nature are represented by these standards; (f) basic standards are used in the same way as commodity price indices are used by the statisticians; (g) serve as a yardstick with which comparison of actual performance can be done; (h) unless there is any change in the products or the manufacturing operations or processes, these standards are not revised. The main advantage of the basic standard is that the number of revisions which with change in cost of materials & labour, would be required, can be minimized.
   
   No change other than a cost relationship computation between the basic period & the current period is required when use of basic standards is done. For the purpose of adjusting the standard costs before comparison is made with the actual costs, this cost relationship computation is used. In industries where the routines & operations are well established & where for a long period working conditions do not normally change, these standards can be use. For highlighting trends these standards may be good but for the purpose of gauging efficiency, basis cannot be formed by these standards.
   
   
3. Normal Standards: Upon the past averages which are adjusted to anticipate future changes, these standards are based. For relatively longer period covering a trade cycle, the preparation of these standards is done. For the formation of these standards, allowance is given to normal fatigues & breaks, normal mistakes in production, normal waste & scrap & normal machine breakdown & maintenance. The cost performance is represented by theses standards which should normally be attained. Because of the probable errors in the prediction of the extent & duration of the cyclical effects, these standards are very likely attainable but they are very difficult to compute. A standard should not be very high so that frustration is caused but it should be high enough so that reasonably diligent effort needed for its accomplishment can be expected. For long term planning & decision making purpose, the normal standard may be good but their utility is limited in appraisal of efficiency.
   
   
4. Ideal Standards: Under these standards, upon perfection, attention is focused. The aim of these standards is on absolutely minimum cost which only in perfect operating conditions can be attained. No scraps, idle time, break down & rest period is provided by these standards. These standards become impossible to be attained in the long run. In practice idle standards are rarely attained & have been referred to as theoretical standards. Unfavorable variances are being revealed by the accounts as regular feature where ideal standards are used. As a result of this among the staff members depressing feeling occurs. Idle standards can be used without change or adjustment for a long time. Unless radical changes are being made in the product or in the manufacturing processes, these standards once set are rarely being changed. These standards can also be used in highly mechanized industry as engineering standards.
   
   
5. Expected or attainable Standards: This standard is a compromise between extremes of normal standard & extremes of idle standard. The main features of these standards are:  (a) for the purpose of providing for operating inefficiencies which are unavoidable, these standards are set; (b) conditions prevailing in the period for which use of standards are made are taken into account; (c) for the purpose of evaluation of performance, these standards provide best criterion & are very realistic in nature; (d) as all requirements of good standards are fulfilled by these standards, i.e., these standards are consistent, are attainable, realistic & provide incentive for improvement; they have got the maximum usage. Level of performance expected in these standards is higher than level of performance expected in normal standard. But this level is higher enough that reasonably diligent effort for accomplishment can be expected. For cost control purpose these standards are very useful & are capable of fulfillment.

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• Establishment of Standards
• Fixed Overhead Variances
• Labour Mix Variance, Revised Efficiency Variance
• Labour Variances, Direct Labour Cost Variance
• Material Mix Variance, Material Yield Variance
• Material Variances
• Sales Variances
• Setting of Standards
• Standard Costing- Introduction
• Standard Time Determination, Standard Rate Determination
• Variances based on Profit Margin, Total Sales Margin Variance
• Variable Overhead Variances