202 Understanding the Numbers
Defining Standards
That evening Tom went over to Jane’s home, and she pulled out her cost ac-
counting textbook. “Tell me everything you think I need to know about stan-
dard costs,” Tom said.
“Okay. First, Tom, let’s get straight what we mean by a standardand
why we’re calculating it. A standard is a basis of comparison; it’s a norm, if
you will, or a yardstick. Some like to compare it to a gauge—a gauge to mea-
sure efficiency.
“But a standard is more than that really because it is also the basis for con-
trol. Standards enable management to keep score. The difference between
standards and actuals directs management’s attention to areas requiring their
efforts. In that sense, standards are attention getters. They form the heart of
what is known as management by exception,the concept that one does not
watch everything all the time; instead one focuses one’s attention on the excep-
tions, the events that are unexpected.”
Tom smiled knowingly. “I’ve experienced this and it’s terrible. My boss at
my last job never noticed the good job that I did every day. But, when some-
thing went wrong, he was down like a shot to bawl me out!”
“That’s one of the traps of managing by exception,” said Jane. “But you’re
smart enough as a manager to know that people need to be rewarded for their
regular jobs. You also know that the exceptions are highlighted so that you can
help them remedy things—not shout at them. Also, outstanding performance
should be rewarded, and so, by means of management by exception, favorable
results are highlighted, allowing high performers to receive praise.”
Types of Standards
“Then you have to realize,” Jane went on, “that there are different kinds of
standards. First you have your basicstandards. These are the one’s that are un-
changing over long periods of time. Many of these are captured in policy state-
ments and may ref lect things like the percentage of waste that is permitted or
the amount of time one might be away from a workstation. Basic standards are
not much use in forming costs, though, because the work environment tends to
change too much.
“At the other extreme there are theoreticalor idealstandards. These get
set by engineers and are the ideals to which one is expected to strive. These are
the standards that I think you feel are unrealistic.”
“Hear! Hear!” broke in Tom. “My guys never would accept those stan-
dards—that’s the perfection mentality I was telling you about.”
“But,” asked Jane, “aren’t the Japanese always striving towards ideal
standards?”
“True, but the difference between them and us is that their system of
lifetime employment provides a more supportive atmosphere in which they can
strive for perfection and not feel they are going to get fired if they don’t quite