Article Details| Standard Costing - The Pros and Cons of Using Attainable Standards |
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Standard costing is a control technique used by management to compare actual costs with expected costs and determine the variance. In setting expected costs or results, it is necessary to select a standard. An attainable standard (AS) is one of four basic standards available in this costing technique. While it is a challenging standard, it remains within reach given normal circumstances. Unlike the ideal standard, it does not assume that favourable circumstances prevail. This standard has its merits and demerits, although one can argue that its merits significantly outweigh the demerits. == Pros == Measurement The data collection involved in setting standards allows management to get a good understanding of target efficiency and peak productivity. This would help beyond standard setting, as management would now have information about capacity and productivity that would help with decisions regarding special orders, for example. Forecasting, planning and decision-making Since attainable standards are realistic, they facilitate cash flows, price setting and budget forecasts easily. This is because they recognize normal inefficiencies. Therefore, apart from aiding control, an AS also addresses the planning and decision-making functions of management. Motivation Attainable benchmarks are challenging, but achievable for the average worker operating at a high level of inefficiency - not just the efficient workers. Therefore, the attainable standard is an incentive for workers. However, if the attainable standard is too low or too high for the average worker, it can defeat its motivational value. Facilitates management by exception Unlike ideal standards, attainable standards more effectively identify abnormal conditions or unfavourable circumstances. This means that significant adverse variances immediately identify abnormal conditions. Management can use deviations from attainable standards as a reliable focal point for management by exception. == Cons == Difficulty in establishing what standards are attainable There might be problem in getting accord concerning how to set the standard and what circumstances to deem as normal. Ideal standards are easier to define because they use the most favourable circumstances. However, attainablebenchmarks rely on a proximate method. Behavioural problems/ employee morale One of the issues with standards in general is that they are used to address negative circumstances primarily. As such, management might fail to recognize outstanding performance and can lapse into addressing adverse performance through management by exception. Employees might resist the implementation of standards that they deem unfair as well. This can lead to work-to-rule and attempts to game the system. The trade-off between quality and quantity might also be an issue arising from such behaviour patterns. Need for resources to monitor standards Attainable standards use considerable resources to establish and maintain. Management must ensure that the standards set are both within range and sufficiently challenging. Finding a balance between the two requires more attention than setting an ideal standard. Favourable variances are not always advantageous As mentioned before, attainable benchmarks have a bias for adverse variances. However, favourable variances can be adverse if they were achieved at the expense of quality. To overcome this, managers should pay attention to all significant variances, whether they are favourable or adverse. == Conclusion == Compared to ideal standards, attainable standards generally have more utility. By taking normal inefficiencies and rest periods into consideration, this standard is very flexible and accommodating to workers. However, if used improperly, attainable standards can be disadvantageous and problematic. |
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