Budgeting Basics and Beyond

8.2. Standard Setting

Standards may be set by engineers, production managers, purchasing managers, and personnel administrators. Depending on the nature of the cost item, computerized models can be used to corroborate what the standard costs should be. Standards may be established through test runs or mathematical and technological analysis.

Standards are based on the particular situation being appraised. Some examples:

Situation	Standards
Cost reduction	Tight
Pricing policy	Realistic
High-quality goods	Perfection

Capacity may be expressed in units, weight, size, dollars, selling price, and direct labor hours. It may be expressed in different time periods (e.g., weekly, monthly, yearly).

Types of Standards

• Basic. These are not changed from period to period and are used in the same way as an index number. They form the basis to which later period performance is compared. What is unrealistic about basic standards is that no consideration is given to a change in the environment.

• Maximum efficiency. These are perfect standards assuming ideal, optimal conditions, allowing for no losses of any kind, even those considered unavoidable. They will always result in unfavorable variances. Realistically, certain inefficiencies will occur, such as materials will not always arrive at workstations on time and tools will break. Ideal standards cannot be used in forecasting and planning because they do not provide for normal inefficiencies.

• Currently attainable (practical). These refer to the volume of ...