Standards based on the optimum level of performance under perfect operating conditions are

The two principal considerations affecting the classification of standards are:

(i) Attainability of standards, that is, the ease with which it is possible to achieve the standards, and

(ii) Frequency with which the standards are revised.

On the basis of these two factors, it is possible to classify standards as ideal, normal, basic, current or expected actual standards.

1. Ideal, Perfect, Maximum Efficiency or Theoretic Standards:

Ideal standards (costs) are the standards which can be attained under the most favourable conditions possible. The level of performance under ideal standards would be achieved through the best possible combination of factors — the most favourable prices for materials and labour, highest output with best equipment and layout, and maximum efficiency in the utilisation of the production resources—in other words, maximum output at minimum cost. Such standards reflect only goals or targets without any hope of performance being currently achieved.

These standards are extremely tight and do not provide for waste and inefficiency in any form; no material is wasted; no units are spoiled; there are no idle hours; operators work at predetermined speeds; the available capacity is fully utilised. The ideal standard represents the ultimate goal to strive for, but its attainment is impossible over sustained periods. It sets its sights on the stars.

2. Normal Standards:

Normal standards are the average standards which (it is anticipated) can be attained during a future period of time, preferably long enough to cover one business cycle. Standards are set on a normal capacity basis which represent a volume that averages out the company’s peak and slack periods. Constant unit costs are employed throughout the cycle, regardless of changes in current costs or selling prices.

These standards are not revised until the cycle has run its full course. This generally results in an incorrect valuation of inventories and consequent errors in the profit disclosed as the inventories are understated in periods of high prices, and overstated when prices are low. Since these standards do not reflect the goals to be attained, they are not often used.

3. Basic Standards:

The Chartered Institute of Management Accountants (UK) defines a basic standard as the standard which is established for use unaltered for an indefinite period which may be a long period of time. Basic standards are seldom revised or updated to reflect current operating costs and price level changes.

Basic standards representing a fixed base are used primarily to measure trends in operating performance. Although useful, basic standards must be adjusted before they can be used for performance evaluation purposes. They can be based upon any capacity level that is selected initially to develop the standards.

4. Currently Attainable or Expected Actual Standards:

Current standards are standards which are established for use over a short period of time, and are related to current conditions. They represent current costs to be expected from efficient opera­tions. These standards do not anticipate ideal performance; they are difficult, but possible to achieve.

Currently attainable standards are formulated after making allowance for the cost of normal spoilage, cost of idle time due to machine breakdowns, and the cost of other events which are unavoidable in normal efficient operations. They take the place of actual cost and are recorded in account books and financial statements. Any deviation from these standards reflect inefficiencies in the production activities, unless the variances have occurred due to uncontrollable factors.

Currently attainable standards are revised to reflect changes in methods and prices. Much effort and costs are involved in developing these standards. Based on engineering estimates, currently attainable standards are most expensive of the four types of standards. But these standards are most accurate and very useful to management in product costing, inventory valuations, estimates, analyses, performance evaluation, planning, employee motivation, and for managerial decision-making and external financial reporting.