In standard costing, standards are predetermined benchmarks or targets used to measure and evaluate actual performance. These standards serve as reference points for assessing efficiency, cost control, and variance analysis. There are two main types of standards: ideal standards and normal standards. Here’s the difference between the two:
- Ideal Standards:
- Definition: Ideal standards set the highest possible level of performance that can be achieved under perfect or ideal conditions. They assume maximum efficiency, no wastage, no machine breakdowns, and no interruptions in the production process.
- Characteristics: Ideal standards are based on theoretical calculations or optimal conditions. They do not account for factors such as realistic levels of employee skills, occasional machine downtime, or minor inefficiencies.
- Purpose: Ideal standards are often used for long-term planning, goal setting, and assessing the maximum potential of the organization. They can highlight areas of improvement and motivate employees to strive for excellence.
- Normal Standards:
- Definition: Normal standards represent achievable performance levels under normal operating conditions. They consider typical levels of efficiency, skill levels, and normal occurrences of wastage or machine downtime.
- Characteristics: Normal standards are more realistic and practical than ideal standards. They incorporate normal levels of employee skill, machine efficiency, and regular interruptions or inefficiencies in the production process.
- Purpose: Normal standards are primarily used for day-to-day cost control, performance evaluation, and variance analysis. They provide a more reasonable basis for assessing actual performance and identifying areas of improvement or potential inefficiencies.
- Level of Performance: Ideal standards represent the highest possible level of performance, assuming perfect conditions, while normal standards reflect achievable performance under normal circumstances.
- Realism: Ideal standards are theoretical and not necessarily attainable in practice, whereas normal standards are based on realistic expectations and consider typical levels of performance.
- Long-term vs. Short-term: Ideal standards are more suitable for long-term planning and goal setting, while normal standards are more relevant for day-to-day operations, cost control, and performance evaluation.
- Motivation vs. Control: Ideal standards can be used to inspire and motivate employees to reach higher levels of performance, while normal standards provide a basis for cost control and identifying areas for improvement.
In practice, organizations may use a combination of ideal and normal standards, depending on the context and purpose. Ideal standards can help set ambitious goals and inspire employees, while normal standards provide a practical framework for evaluating actual performance and identifying areas for improvement. It is important for organizations to establish appropriate standards that are challenging yet realistic to encourage continuous improvement and effective cost control.