Calculation of a standard cost is based on physical
standards, two types of which are often discussed, a
basic standard and current standards.
standard is a
yardstick against which both expected and actual
performances are compared. It is similar to an index
number against which all later results are measured.
Current standards are of three types:
The expected actual standard is a standard set
for an expected level of operation and
efficiency. It is a reasonably close estimate of
normal standard is a standard set for a normal
level of operation and efficiency, intended to
represent challenging yet attainable results.
theoretical standard is a standard set for an ideal
or maximum level of operation and efficiency. Such
standards constitute goals to be aimed for rather
than performances that can be currently achieved.
and labor costs are generally based on normal, current
conditions, allowing for alterations of prices and rates
and tempered by the desired efficiency level. Factory
overhead is based on normal conditions of efficiency and
must be established for a definite period of time to be
effective in the control and analysis of costs.
Standards are usually computed for a six or twelve-month
period, although a longer period is sometimes used.
success of a standard costing system depends on the
reliability, accuracy and acceptance of the standards.
Extreme care must be taken to be sure that all factors
are considered in establishment of standards. In certain
cases, a sampling of averages derived from the records
of previous periods are used as standards. However, the
most effective standards are set by the industrial
engineering department on the basis of careful studies
of products and operations, using appropriate sampling
techniques and including participation by those
individuals whose performance is to be measured by the
must be set, and the system implemented, in an
atmosphere that gives full consideration to behavior
characteristics of managers and workers. In the long
run, workers and plant management will tend to react
negatively if they feel threatened by imposed standards.
If they participate in setting standards, they can more
readily identify with the standard costing procedure and
the standards could become their personal goals.
which are too loose or too tight will generally have a
negative impact on worker motivation. If standards are
too loose, workers will tend to set their goals at this
low rate, thus reducing productivity below what is
obtainable. If the standard is too tight, workers
realize the impossibility of attaining the standard,
become frustrated, and will not attempt to meet the
standard. A reasonable standard which can be attained
under normal working conditions is likely to contribute
to the worker's motivation to achieve the designated
level of activity or productivity.
standards are set, it is important to provide the proper
standard cost cards, on which the itemized cost of each
materials part, labor operation, and overhead cost is
shown. A master standard cost card gives the standard
unit cost of a product. The master standard cost card is
supported by individual cards that indicate how the
standard cost was compiled and computed. Each subcost
card represents a form of standard cost card.