ACCA Applied Knowledge · Management Accounting · Standard costing system
A company sets its labour time standard on the basis of ideal working conditions, with no allowance for breaks, machine breakdowns or idle time. What is the most likely behavioural effect of this type of standard?
Ideal standards assume perfect conditions with no allowance for breaks or breakdowns, so they are rarely achieved. This leads to regular adverse efficiency variances, which can demotivate employees because the target seems unattainable. Easy achievement and large favourable results belong to loose standards, not ideal ones.
- AEmployees will be motivated to exceed it by large margins
- BAdverse efficiency variances will be reported regularly, which may demotivate employeesCorrect
- CFavourable rate variances will always arise
- DThe standard will be easy to achieve, so no variances will arise
Explanation
An ideal standard assumes perfect conditions and so is almost impossible to reach. Actual performance will usually fall short, producing persistent adverse variances and potentially discouraging staff. Exceeding it or meeting it easily would be typical of loose standards, and rate variances relate to pay rates, not time.
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