Nothing standard about Standard Costing

Accountants call it standard costing but there is nothing standard about it at all!

Standard signifies something common, but only the methodology remains standard. Accountants agree on more than one standard without agreement on how many. Some accounting textbooks say there are two types of standard, others three, and a few up to five and more with terms such as ideal, basic, current, expected and normal standards. so accounting literature on Standard Costing remains vast.

The most popular accounting theory agrees on three types standard costing. The Irish Institute for instance claim these three exist:

Basic standard costs

Ideal standard costs

Currently attainable standard costs [1]

To call it standard costing and then declare up front that there are three or more different standards proves yet again how accountants like the complicated.  They, and not just the Irish Institute, then go on to explain that these three standards have major weaknesses. Some so serious companies do not use them.

 Basic standard costs do not change over many years. It provides a base for comparison with actual cost over a period of years. However, changes will occur over time rendering the standards useless, because they do not represent current costs and and variance analysis merely explains differences against standard when they were calculated.  

Ideal standard costs assume 100% efficiency and no idle time.  Companies, generally, do not use these standards in practice, because they tend to demote staff from their persistent negative variances. To overcome this weakness, some companies set standards as goals to aim for rather than the perfect performance. This makes not three, but now four, different standard costing methods!  

Currently attainable standard costs should be attainable under efficient operating conditions. These standards incorporate the possibility of machine breakdowns, normal wastage and lost time. Accounting theorists generally recommend this method of setting standards which just proves that there are as many standards costs as companies that use them. ‘Attainable’ in one company does not equal the same ‘attainable’ in another.

Thus accountants, not only make the theory of standard costing complicated, they mislead the world with the term standard, for there are more than the declared theoretical types, there are millions of them. There are as many standards as there are companies using them.

Accountants should not call the method Standard Costing but Individual Costing or Variance Costing or something completely different. Anything but Standard.

Leave a Reply