Page 164 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 8: Standard Costing

1. Basic Standard: This is a ‘standard’ which is established for use, unaltered over a long Notes
period of time. Standards are fixed scientifically and hence it is more of a technical job.
These standards are supposed to remain unchanged so long as quality requirements are
constant. Moreover, if forward contracts are entered into regarding materials and labour
pact signed for a certain period, the costs can be planned accordingly. Such costs, i.e., basic
standards may, however, have to be adjusted for changes in circumstances in a period.

2. Current Standard: In practice, standards are fixed on the basis of scientific studies but
adjusted for current subjective factors. A standard, therefore, is made realistic to reflect
the anticipated conditions affecting operations; it is not too idealistic. Such a standard
would bring to sharp focus the avoidable causes for variances, leading to control action.
A current standard is a standard for a certain period, for certain conditions and for certain
circumstances. Basic standards are more idealistic whereas current standards are more
realistic. Most companies use current and not basic standards.

3. Expected or Attainable Standard: A standard though idealistic, should also be realistic.
If targets are fixed for a certain budgeted period, taking into account the expected conditions,
it can be known as “expected standard” or “attainable standard”. It is defined by CIMA,
London as, “A standard which can be attained if a standard unit of work is carried out
efficiently, a machine properly operated or a material properly used. Allowances are made
for normal losses, waste and machine downtime.”
4. Normal Standard: Yet another target is one that is intended to cover a longer period of
time— a period long enough to cover one trade cycle, i.e., roughly 7 to 10 years. This is
defined as “the average standard which it is anticipated can be attained over a future
period of time, preferably, long enough to cover one trade cycle”.
5. Ideal Standard: This standard refers to the target that can be attained under most ideal
conditions. Hence, it is more idealistic and less realistic. It is defined by the terminology
as: “The standard which can be attained under the most favourable conditions, with no
allowance for normal losses waste and machine down time”.

Did u know? How to Prepare Standard Cost Sheet?
When all the standard costs have been determined, a Standard Cost Sheet is prepared
for each product or service. The process of setting standards for materials, labour and
overheads results in the establishment of the standard cost for the product. Such a cost
sheet shows for a specified unit of production, quantity, quality and price of each type
of materials to be used, the time and the rate of pay of each type of labour, the various
operations the product would pass through, the recovery of overhead and the total cost.
The build-up of the standard cost of each item is recorded in standard cost sheet. These
details serve as a basis to measure the efficiency against which actual quantities and costs
are compared. The type of standard cost sheet varies with the requirements of individual
firm hence no uniform format can be prescribed.

Self Assessment

Fill in the blanks:
16. Basic standards are more idealistic whereas current standards are more ………………

17. The build-up of the standard cost of each item is recorded in ………………
18. A ……………… is a standard for a certain period, for certain conditions and for certain
circumstances.

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