Question

What are the comparative advantages and disadvantages of ideal versus normal standards?
What are the factors that should be included in setting the price and quantity standards for direct materials, direct labor, and manufacturing overhead?

Answer 1

Ideal standards are the standards which showcase how th business operations and numbers look like in an ideal situation i.e. when everything is perfect and ideal. Advanatges of this is that these standards continuously motivate the workers of the organisation to achieve the ideal level of output with the ideal (minimum cost). However, with the complexilities of market and human nature involved, it is next to impossible ton achieve ideal standards. This is the major drawback/disadvantage of ideal standards i.e. they are unattainable. Therefore, these standards are meant for motivating employees.

Normal Standards are those which are expected to prevail in the normal circumstances. These standards are more realistic and attainable. The biggest disadvantage of Normal Standards is that the situation cannot be predicted in advance. Factors which were thought to be controllable might not be controllable in reality, which makes these standards theoritical in nature. The major advantage of these standards is that these standards represent challenging but attainable goals and can be implemented in case of such environment which is less prone to fluctuations.

Factors to be included in setting price and quantity standards for Direct Material, Labour and Manufacturing Overheads are:

1. Past Data

2. Normal Wastage

3. Downtime of workers

4. Market Situation

5. Availability of Resources

6. Rates prevailing in the Market

7. Expected fluctuations