TYPES OF STANDARDS

TYPES OF STANDARDS

Types of standards are as below:

(i) Ideal Standards : These represent the level of performance attainable when prices for material and labour are most favourable, when the highest output is achieved with the best equipment and layout and when the maximum efficiency in utilisation of resources results in maximum output with minimum cost.

These types of standards are criticised on three grounds:

(a) Since such standards would be unattainable, no one would take these serious- ly.

(b) The variances disclosed would be variances from the ideal standards. These would not, therefore, indicate the extent to which they could have been rea- sonably and practically avoided.

(c) There would be no logical method of disposing of these variances.

(ii) Normal Standards:These are standards that may be achieved under normal operating conditions. The normal activity has been defined as “the number of stand- ard hours which will produce at normal efficiency sufficient good to meet the average sales demand over a term of years”.

These standards are, however, difficult to set because they require a degree of fore- casting. The variances thrown out under this system are deviations from normal efficiency, normal sales volume, or normal production volume.

If the actual performance is found to be abnormal, large variances may result and necessitate revision of standards.

(iii) Basic or Bogey Standards: These standards are used only when they are likely to remain constant or unaltered over a long period. According to this standard, a base year is chosen for comparison purposes in the same way as statisticians use price in- dices. Since basic standards do not represent what should be attained in the present period, current standards should also be prepared if basic standards are used. Basic standards are, however, well suited to businesses having a small range of products and long production runs. Basic standards are set, on a long-term basis and are seldom revised. When basic standards are in use, variances are not calculated. Instead, the actual cost is expressed as a percentage of basic cost. The current cost is also similarly expressed and the two percentages are compared to find out how much the actual cost has deviated from the current standard. The percentages are next compared with those of the previous periods to establish the trend of actual and current standard from basic cost.

(iv) Current Standards: These standards reflect the management’s anticipation of what actual costs will be for the current period. These are the costs which the busi- ness will incur if the anticipated prices are paid for the goods and services and the usage corresponds to that believed to be necessary to produce the planned output.

The variances arising from expected standards represent the degree of efficiency in usage of the factors of production, variation in prices paid for materials and services and difference in the volume of production.