## **Learning Outcomes**

After reading this article, you will be able to explain the different types of standards used in standard costing systems, such as basic, attainable, ideal, and current standards, and describe their impact on motivation and performance measurement. You will also understand how standards are used in flexed budgets to create fair benchmarks, and be able to select and apply appropriate benchmarks for exam scenarios in ACCA Performance Management.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you are required to understand how standards are set and flexed for use in performance measurement and control. This article focuses your revision on:

- The purpose and methods of setting standard costs and benchmarks
- The different types of standards (basic, attainable, current, ideal), including when and why each is used
- How standards affect staff motivation and behaviour
- The application of flexed (flexible) budgets for fair and meaningful comparison in performance management
- Selection of suitable benchmarks and explanation of their limitations

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which type of standard is normally set at a level that skilled staff can realistically achieve with efficient working?
   a) Basic
   b) Attainable
   c) Ideal
   d) Current

2. True or false? An ideal standard is usually more motivating for employees than an attainable standard.

3. Why is it important to flex a budget when comparing actual to standard costs at different levels of activity?

4. Briefly explain the difference between a current standard and a basic standard.

## **Introduction**

Standard costing is a core technique for cost control and performance measurement in management accounting. Standards set the expected price, quantity, time, or usage for resources in producing goods or services. These standard figures become the benchmarks against which actual results are compared, enabling businesses to identify and analyse variances.

However, not all standards are the same. The level at which a standard is set—the “difficulty”—directly influences business planning, managerial motivation, and the usefulness of performance data. Selecting the right type of standard for your organisation’s context is critical for fairness and improvement.

Once set, standards are also used as the basis for flexed budgets, ensuring fair performance comparisons when activity levels differ from the original plan.

> **Key Term: standard cost**
> A predetermined target cost, set for each unit of input or output, which serves as a benchmark for measuring actual performance.

## **Types of Standards in Standard Costing**

The level at which a standard is set determines both its effectiveness as a control tool and its impact on the behaviour and motivation of staff. The main types are:

### Attainable Standards

These standards assume efficient, but not perfect, operating conditions. They allow for normal expected wastage, occasional breakdowns, and reasonable levels of fatigue or delays. Attainable standards set a challenging but realistic target, and are generally considered the most effective for motivating performance and fair evaluation.

> **Key Term: attainable standard**
> A standard based on efficient operation, incorporating normal expected losses and disruptions, which is realistically achievable by skilled employees.

### Basic Standards

A basic standard is set for a long period and left unchanged. It serves mainly as a “yardstick” to show trends over time, rather than to highlight current performance. Because it can become outdated, it is generally not useful for short-term control or motivation but is sometimes used for analysis of long-term cost trends.

> **Key Term: basic standard**
> A standard set and held constant over several years, used primarily for tracking changes and long-run trends rather than short-term control.

### Current Standards

A current standard reflects the present operating conditions, however good or bad those may be. This type of standard may be used when circumstances are unstable or abnormal (for example, a period of major supplier disruption). The current standard provides a short-term target, but does not encourage improvement or challenge staff.

> **Key Term: current standard**
> A standard based on actual operating conditions at a specific point in time, typically used when normal performance is not achievable.

### Ideal Standards

Ideal standards are set at the theoretical maximum efficiency: no wastage, no breakdowns, no idle time—effectively “perfect” conditions. While this shows the lowest cost or highest efficiency theoretically possible, it is rarely achieved in practice. Ideal standards often demotivate staff, as any deviation will show as an adverse variance regardless of effort.

> **Key Term: ideal standard**
> A standard based on perfect operating conditions with no allowance for normal losses, fatigue, or delay; virtually impossible to achieve in practice.

### **Worked Example 1.1**

A manufacturing company is reviewing its standard setting. The last standard for labour time allowed 10% downtime for rest and machine maintenance, and assumed 2% normal material wastage. Management is considering removing all allowances to create a “zero-waste, zero-downtime” standard.

**Question:** What type of standard was originally in place, and what would the new standard be classified as? What is the likely impact of this change on staff motivation?

> **Answer:**
> The original standard is attainable, as it allows for normal disruptions. The proposed “zero-waste, zero-downtime” standard is an ideal standard. The likely impact is negative staff motivation, as it would be almost impossible to achieve, meaning staff always report adverse variances despite working efficiently.

## **Selecting and Flexing Benchmarks**

Comparisons in performance management are only fair if the standards reflect the actual level of activity achieved.

A “fixed” budget, based on an original output target, can be misleading if output changes. For example, if more units are made than planned, variable costs (and possibly some overheads) will naturally increase. To make a fair comparison, the budget must be “flexed” (adjusted) to match the actual activity for the period.

> **Key Term: flexed budget**
> A budget recalculated for actual levels of activity, using standard costs per unit, to provide a fair benchmark for performance evaluation.

### Why Flex? An Example

Suppose a company sets a budget to produce 5,000 units with a standard variable cost of \$4 per unit. In reality, 6,000 units are produced, with an actual spend of \$25,500 on variable costs.

- Original budget: 5,000 × \$4 = \$20,000
- Flexed budget: 6,000 × \$4 = \$24,000

Comparing the actual spend of \$25,500 with the original budget of \$20,000 would show an apparent \$5,500 overspend—unfair, since 1,000 extra units were produced. Comparing with the flexed budget reveals the real variance: \$25,500 vs \$24,000 = \$1,500 adverse.

### **Worked Example 1.2**

A company set the following standards and actuals for a production department:

- Standard material per unit: 3kg at \$5 per kg (Attainable standard)
- Budgeted output: 1,000 units
- Actual output: 1,200 units
- Actual material used: 3,700kg at \$5.20 per kg

**Required:** Prepare a flexed materials cost budget and calculate the total material variance.

> **Answer:**
>
> - Flexed standard usage: 1,200 units × 3kg = 3,600kg × \$5 = \$18,000
> - Actual material cost: 3,700kg × \$5.20 = \$19,240
> - Total material variance: \$19,240 (actual) – \$18,000 (flexed standard) = \$1,240 adverse  
>   The variance should be analysed further, but only after the budget is flexed for actual output.

### **Revision Tip**

Always flex variable and semi-variable costs to the actual units produced before comparing to actuals. Never compare to the original fixed budget when output differs—this is a leading cause of lost marks in exams.

## **Motivation and Behavioural Impact of Standards**

How “hard” a standard is to achieve affects employee motivation.

- Attainable standards: Usually optimal for motivation. They are challenging but realistic, so staff see them as fair.
- Ideal standards: Demotivating. Staff may ignore them as “impossible” and lose interest in performance reports.
- Basic standards: Can become too easy over time, possibly encouraging complacency—and may not be used for performance management.
- Current standards: May not provide any incentive for improvement.

Managers should select attainable standards for control, and regularly review whether basic or current standards remain useful.

## **Summary Table: Types of Standards**

| **Type**   | **Definition**       | **Purpose**           | **Motivational Impact**    |
| ---------- | -------------------- | --------------------- | -------------------------- |
| Attainable | Efficient, realistic | Control, benchmarking | Positive, achievable       |
| Basic      | Long term, unchanged | Trend analysis        | Can demotivate if outdated |
| Current    | Actual conditions    | Short-term planning   | Little impact              |
| Ideal      | Perfect conditions   | Theoretical minimum   | Usually negative           |

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Types of standards: attainable, basic, current, ideal
- Purpose of setting standards in control and benchmarking
- Definition and use of flexed budgets for fair variance analysis
- The motivation and behavioural impact of different types of standard
- How to select suitable benchmarks and avoid common errors when flexing budgets

## **Key Terms and Concepts**

- standard cost
- attainable standard
- basic standard
- current standard
- ideal standard
- flexed budget

Setting standards and flexing - Types of standards and attainable benchmarks