Page 221 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes because it has remained unaltered over a long period of time, it may be out of date.
The main advantage is in showing the changes in trend of price of product and
efficiency from year to year.
(ii) Current Standard: According to ICMA, it is “A standard which is established for use
over a short period of time and is related to current conditions.”

Current standard is a standard established for use over a short period of time,
related to current conditions. The problem with this type of standard is that it does
not try to improve on current levels of efficiency.
(iii) Ideal Standard: The terminology of ICMA defines ideal standard as, “A standard
which can be attained under most favourable conditions. No provision is made, for
example, for shrinkage, spoilage or machine breakdowns. Users believe that the
resulting unfavourable variances will remind management of the need for
improvement in all phases of operations. Ideal standards are not widely used in
practice because they may influence employee motivation adversely.”

Ideal conditions are seldom found to prevail. Consequently, if actual outcome is
compared with a standard based on this concept, it would give rise to large adverse
variances. This would have an adverse effect on the motivation, productivity and
satisfaction of the employees. Generally, it is not used in practice as the information
generated by a standard costing system using this standard has no practical utility.
(iv) Attainable Standard: Attainable standard is a standard which can be attained if a
standard unit of work is carried out efficiently, on a machine properly utilised or
material properly used. Allowances are made for normal shrinkage, waste and
machine breakdowns. The standard represents future performance and objectives
which are reasonable attainable. Besides having a desirable motivational impact on
employees, attainable standards serve other purposes, e.g., inventory valuation,
cash budgeting and budgeting departmental performance. If correctly set attainable
standards are the best type of standard to use, since they provide employees with a
realistic target. Attainable standards have the greatest motivational impact on the
workforce.

4. Setting the Standards: After choosing the standard, the setting of standard is vested with
the standard committee. It is similar to the budget committee. It consists of:
(i) The purchasing manager,

(ii) The production manager,
(iii) The production engineer,
(iv) The personnel manager,
(v) The sales manager, and

(vi) The cost accountant and other functional heads of the organisation.
The cost accountant is more important than the others and he has to supply the necessary cost
figures and coordinate the activity committee. He must ensure that the setting standards are
accurate.

12.3.1 Setting up of Standard Costs

Standards in respect of various elements of costs and the process of their establishment only
have been discussed here. Normally, standard costs are set in respect of the following:

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