The choice of standard is critical to the standard costing (SC) technique. It directly influences the standard cost measurements employed within an organisation. The benchmark selected is a primary step in the SC technique and can be a source of contention as well. Selection is dependent on input from a range of stakeholders within the organisation. However, there is a conceptual aspect of standard setting.

Some managers prefer the ideal while others prefer something that is challenging but attainable. The basic question is "just how attainable should the standard be?" In addressing this question, managers have the option of one of four standards:

a) Basic (BS)

b) Ideal (IS)

c) Attainable (AS)

d) Current (CS)

The basic standard is a practical one, since it relies on established productivity patterns gleaned from historical data. It is designed for use in the medium-to-long-term and can later become the basis for a current standard. The CS is one that is utilized in the short-term and is related to extant conditions. This is appropriate for extenuating or unusual circumstances. For example, if a production unit has to deal with special orders, abiding by a CS can help to achieve the productivity necessary to complete the orders by a deadline.

An ideal standard determines what costs or outputs can be achieved in the most favourable or best circumstances. This means that one would set a standard without factoring obstacles like unavailability of raw materials, machine downtime and other interruptions in the production process. The IS also assumes that workers would put in 100% effort and attempt to define what maximum labour output is as well.

Naturally, the IS can be highly controversial, particularly if used poorly by managers in addressing adverse variances. By its nature, adverse variances from ideal benchmarks are expected and effectively discovering the root cause of these variances would be more problematic, since adverse variances are inevitable.

An attainable standard recognizes the need for a challenging efficiency target but is more realistic. It factors in rest periods, machine downtime and other usual interruptions. In other words, it does not set a benchmark according to the most favourable circumstances but the most likely circumstances.

The division between the IS and practical standards is an important fundamental. In production processes that have high quality benchmarks, the ideal might actually be very appropriate. However, for other processes, an attainable standard, which allows for normal inefficiencies, might be a lot better for employee morale, motivation and forecasting. Choosing the best benchmark has serious implications for the effectiveness of the SC technique in managing by exception.

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