Types of standard costing

Answer 1

Standard in simple words is a measure of what is expected to take place under the current or anticipated circumstances. Another way of defining standard is that it is something that is predetermined or planned and management wishes that actual results equate to standards.

Standards are one of important quantitative tools in the hand of management to control and measure performance of business operations. However it heavily depends on the type of standards used to decide about the control actions and to measure the performance.

Types of standardsFollowing are different types of standards:

• Basic standards
• Normal standards
• Current standards
• Attainable (expected) standards
• Ideal (theoretical) standards

Basic standards

These are standards established considering those factors that are basic in nature and remain unchanged over a long period of time and are altered only when the business operations change significantly affecting the very basic foundations of the entity and nature of busienss. These standards help compare business operations over a longer period of time. Basic standards are used not only to evaluate actual results but also current expected results (current standards). We can say that basic standards work as a standard for other standards. As basic standards are not updated according to latest circumstances thus they are not used often as they cannot help in short term period variance analysis.

Normal Standards

These are such standards which are expected if normal circumstances prevail. Term normal represents the normal conditions of the business in the absence of any unexpected fluctuations (either favourable or unfavourable). Even through normal standards are more of a theoretical in nature as reality cannot be sufficiently predicted with all its fluctuations in advance. Also, circumstances may change in such a way that factors which were expected to be controllable are not so controllable by the mangers. Thus it has limited application in today's business environment. However, normal standards acts as a good yardstick that represents challenging yet attainable results and can be used by management in such environment which is simple in nature and is not prone to great fluctuations.

Current standards

These standards are representative of current business conditions. These are mostly short term in nature and are widely used as they are the most relevant standards to be used for control purposes. These standards represent the state that business currently achieving or must achieve.

Attainable standards / Expected standards

These standards are based on current conditions and circumstances and represents what can be attained with the present setup in place and if the current conditions prevail. Current standards may be set lower or easier then expected standards but good managers always try to achieve what is attainable so that no resource is left unused. It means that attainable standards are representative of the potential that business is capable to achieve. For example a machinery is expected to run for 4,000 hours where it can run for 5,000. Thus current standard is 4,000 hours where attainable is 5,000 hours. These standards are useful as they help management to analyze their performance and to use the unused potential at the right time.

Ideal standards / Theoretical standards.

These standards represents what business operations would be under ideal set of circumstances where everything is running at the optimum level with an ideal balance. These standards are representative of long term goals rather than for short term performance measurement. But with the advancement of technology and inventions even the ideal standards become attainable over the period of time but with every step taken forward and every question answered, more questions and more complexities pop up and its in human nature that it always extends the way forward with every milestone achieved. Therefore, ideal standards are not meant to be achieved rather to act like a guiding star.