Standard Costs

Standards may be defined as measured quantities which should be attained in connection with some particular operation or activity. Standards are performance expectations. Stated in terms of a test of efficiency, a standard is a precise measure of what should occur if the performance is efficient. For example, a certain percentage of marks may be a standard to qualify in a certain examination or to obtain a certain grade. Standards describe an approach to implement and achieve the goals of the firm. The standards are set by management in accordance with the best judgement. Standards can be set only for repetitive tasks, that is, for work which is repeated again and again. Standards cannot be set for tasks which are not performed regularly and continuously.

Standard cost may be defined as a criterion or measure of acceptable cost performance. Standard costs may be ideal, expected, and normal. The ideal standard cost refers to estimates of costs under ideal or perfect conditions without any wastage or scrap. The expected standard cost is based upon the most likely attainable result. It is really not a standard as there is no inherent element of efficiency which is the basic consideration underlying standard costs. Normal standard costs are costs which are attainable but their achievement requires that operations and activities are efficient.

Standard costs represent a control technique. They are a target which the management attempts to achieve. The control process involves a comparison of the actual performance with the standards set by management. The extent of success would be revealed by the relationship between the actual and the standard. If the actual performance coincides with the target, the performance can be said to be satisfactory. In case of deviations, management would have to analyse the causes. These deviations are referred to as variance.