# Types of Standards in Standard Costing

The type of standard chosen fundamentally affects the size of variances, the motivation of workers, and the usefulness of performance reports.

## (i) Ideal Standards

Represent highest possible performance under most favourable conditions
Assume: optimal material prices, best equipment, zero wastage, no idle time, maximum efficiency
Why it fails: Unattainable in practice → variances are almost always adverse
Impact: Demoralises workers; variances do not indicate practical improvement areas
Not recommended for routine performance evaluation
Best use: Theoretical benchmark for engineering perfection

## (ii) Normal Standards

Achievable under normal operating conditions
Based on average sales demand over time, including allowances for normal inefficiencies
Variances reflect: Deviations from normal efficiency, sales volume, or production volume
Abnormal performance leads to significant variances → signals need for standard revision
Most widely used in practice for day-to-day cost control

## (iii) Basic (Bogey) Standards

Set to remain constant over a long period — like a base year in index numbers
A base year is chosen; actual costs are expressed as a percentage of basic cost
Variances are NOT calculated under this system
Suitable for: Businesses with limited product range and long production runs
Primary use: Long-term trend analysis (e.g., how costs have moved since the base year)

## (iv) Current Standards

Reflect management's best estimate of actual costs for the current period
Based on current expected prices for materials, labour, services, and planned output
Variances highlight: Efficiency in resource use, actual vs. expected price differences, volume differences
Most realistic standard — revised as conditions change

## Comparison Table

Feature	Ideal	Normal	Basic	Current
Achievability	Impossible	Achievable	Historical reference	Realistic
Worker motivation	Low (demoralising)	High	Moderate	High
Variance calculation	Yes	Yes	No (% used)	Yes
Revision frequency	Rarely	Periodically	Rarely	Annually or as needed
Primary purpose	Theoretical benchmark	Day-to-day control	Trend analysis	Realistic planning

Worked example

### Example 1

A factory sets an Ideal Standard of 0% material wastage. Actual wastage = 3%. Adverse variance = 3% of material cost. Since zero wastage is physically impossible, the entire 3% is uncontrollable and provides no actionable insight. If a Normal Standard of 2% unavoidable wastage is set instead, the controllable adverse variance = only 1% — far more actionable for the production manager.

### Example 2

Basic Standard in action: Base year (2015) material cost = ₹400/kg. Current year actual cost = ₹600/kg. Actual cost as % of basic cost = (600 ÷ 400) × 100 = 150%. This shows a 50% cost increase over 10 years — useful for long-term strategic pricing review, even though no variance is calculated.

⚠️ Common exam mistakes

Confusing Ideal Standards with Current Standards — Ideal is theoretically perfect (never attained); Current is what management realistically expects to pay/spend in the period.
Saying Normal Standards produce no variances — Normal Standards do generate variances whenever actual performance deviates from the defined 'normal' level.
Forgetting that Basic Standards do NOT use variance analysis — the comparison is expressed as actual cost as a percentage of basic cost, not as a variance.
Thinking Basic Standards are updated annually — they are intentionally kept constant over many years to enable long-term trend comparison.

Reference:

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