Setting of Standards is the starting point of the entire standard costing system. Before production begins, you pre-decide the should-be cost for one unit — how much material, how many labour hours, how much overhead. This pre-decided cost is the standard cost, and it becomes your measuring stick. Every variance you calculate in the rest of this chapter flows from how well (or badly) actual performance matched these standards.
There are four types of standards ICAI wants you to know. Ideal Standard assumes zero wastage, zero idle time, perfect efficiency — sounds great, but it's demotivating because you'll always show an adverse variance. Nobody achieves perfection. Normal Standard (also called Expected or Attainable Standard) is realistic — it builds in normal wastage, average worker efficiency, and routine machine downtime. This is the most important one for your exam; assume Normal Standard unless the question says otherwise. Basic Standard is a historical benchmark set once and rarely changed — used to study long-run trends, not for day-to-day cost control. Current Standard is revised frequently to reflect current conditions, useful when prices are volatile.
Now, how do you actually set a standard? For Standard Material Cost, you nail down two things: (a) Standard quantity — the input quantity needed per unit of output, including normal process loss, and (b) Standard price — expected purchase price including freight and duties, minus trade discounts. For Standard Labour Cost, fix: (a) Standard hours — the time an average-skilled worker takes per unit, including normal idle time, and (b) Standard wage rate — basic pay plus DA and other allowances. For Standard Overhead, compute a Standard Overhead Absorption Rate (OAR) = Budgeted Overhead ÷ Budgeted Activity Level. Critically, always split fixed and variable overheads — treating them as one rate will kill your overhead variance analysis later.
All these elements come together in a Standard Cost Card, a per-unit summary of all cost components. In exam questions, you'll either be given the card and asked to compute variances, or be asked to build the card from scattered data. Master the card, and standard costing becomes mechanical. This topic appears frequently as a 4-mark theory question — 'Distinguish between Ideal and Normal Standards' or 'State factors considered while setting material price standards' — so don't treat it as just an intro.