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Unit 10: Standard Costing

A target should be such that it will induce the worker to give out his best. In order to make people Notes
believe in standards and to induce them towards achieving them, standards should better be such as
can be achieved but with an effort; in other words, they should be somewhat idealistic.
1. Basic Standard: This is a ‘standard’ which is established for use, unaltered over a long
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”.

10.7 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.

10.8 Summary

Standard costing is a tool, which replaces the bottleneck of the historical costing.
Historical costing facilitates to ascertain the cost of a product which is connected with
yester operations or with past.

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