Companies set standards at one of two levels: ideal or normal. Ideal standards represent optimum levels of performance under perfect operating conditions. Normal standards represent efficient levels of performance that are attainable under expected operating conditions.
Some managers believe ideal standards will stimulate workers to ever‐increasing improvement. However, most managers believe that ideal standards lower the morale of the entire workforce because they are difficult, if not impossible, to meet. Very few companies use ideal standards.
Most companies that use standards set them at a normal level. Properly set, normal standards should be rigorous but attainable. Normal standards allow for rest periods, machine breakdowns, and other “normal” contingencies in the production process. In the remainder of this chapter, we will assume that standard costs are set at a normal level.
ACCOUNTING ACROSS THE ORGANIZATION
How Do Standards Help a Business?
A number of organizations, including corporations, consultants, and governmental agencies, share information regarding performance standards in an effort to create a standard set of measures for thousands of business processes. The group, referred to as the Open Standards Benchmarking Collaborative, includes IBM, Procter and Gamble, the U.S. Navy, and the World Bank. Companies that are interested in participating can go to the group’s website and enter their information.
Source: Becky Partida, “Benchmark Your Manufacturing Performance,” Control Engineering (February 4, 2013).
How will the creation of such standards help a business or organization? (Go to WileyPLUS for this answer and additional questions.)
When standards are set too high, employees sometimes feel pressure to consider unethical practices to meet these standards.
A Case Study
To establish the standard cost of producing a product, it is necessary to establish standards for each manufacturing cost element—direct materials, direct labor, and manufacturing overhead. The standard for each element is derived from the standard price to be paid and the standard quantity to be used.
To illustrate, we use an extended example. Xonic Beverage Company uses standard costs to measure performance at the production facility of its caffeinated energy drink, Xonic Tonic. Xonic produces one‐gallon containers of concentrated syrup that it sells to coffee and smoothie shops, and other retail outlets. The syrup is mixed with ice water or ice “slush” before serving. The potency of the beverage varies depending on the amount of concentrated syrup used.
DIRECT MATERIALS The direct materials price standard is the cost per unit of direct materials that should be incurred. This standard is based on the purchasing department’s best estimate of the cost of raw materials. This cost is frequently based on current purchase prices. The price standard also includes an amount for related costs such as receiving, storing, and handling. The materials price standard per pound of material for Xonic Tonic is as follows