What is Normal Standard?
A Normal Standard in accounting is an average or baseline standard that is used within the framework of standard costing. This concept is set to apply over a future period under the assumption that conditions are unlikely to change significantly. The normal standard serves as a benchmark for evaluating actual performance by comparing it against expected performance levels.
Key Features:
- Baseline Measurement: It provides a reference point or baseline against which actual performance and costs can be measured.
- Future-oriented: It is applied over a future period where the conditions are expected to be stable.
- Cost Control: It helps in cost control and performance evaluation by setting a predetermined standard.
Examples of Normal Standard
- Manufacturing Industry: A manufacturing company sets a normal standard for the number of labor hours required to produce one unit of a product. Suppose the standard is 4 hours per unit based on historical data and expected future conditions. This standard will be used to assess future performance.
- Service Industry: A customer service center sets a normal standard for the average call handling time at 7 minutes per call. This average is based on past performance and is expected to remain unchanged in the near term.
- Retail Sector: A retail store establishes a normal standard for inventory turnover based on past sales data and forecasted market stability. The standard helps in managing inventory levels and evaluating future performance.
Frequently Asked Questions (FAQs)
What is the purpose of a normal standard?
The purpose of a normal standard is to provide a benchmark for measuring actual performance against predetermined cost and efficiency standards, facilitating effective cost control and performance evaluation.
How is a normal standard different from an ideal standard?
A normal standard is based on average or expected conditions, while an ideal standard is based on perfect or optimal conditions and does not account for normal inefficiencies or variances.
Who sets the normal standards in an organization?
Normal standards are usually set by the management or the accounting department with inputs from various departments such as production, finance, and operations.
How often should normal standards be reviewed?
Normal standards should be reviewed periodically, usually annually or semi-annually, to ensure they remain relevant and accurate given any changes in business conditions.
Can normal standards change?
Yes, normal standards can change in response to significant changes in conditions such as technology advancements, market conditions, or operational processes.
Related Terms and Definitions
Standard Costing:
A systematic approach to comparing standard costs and actual costs to understand variances and manage cost control.
Variance Analysis:
The process of analyzing the differences between actual costs and standard costs to manage performance.
Ideal Standard:
A standard based on perfect or optimal conditions, with no allowances for inefficiencies.
Budgeting:
The process of creating a plan to manage the financial resources of an organization.
Cost Management:
The process of planning and controlling the budget of a business or project.
Online References
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Investopedia - Standard Costing: investopedia.com/terms/s/standard-costing.asp
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Chartered Institute of Management Accountants (CIMA) Articles on Costing: cimaglobal.com/Knowledge/Archive/CIMA-Publications/Articles/Costing-articles/
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Accounting Tools - Normal vs. Ideal Standards: accountingtools.com/articles/normal-standard.html
Suggested Books for Further Studies
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Cost Accounting: Foundations and Evolutions by Michael R. Kinney and Cecily A. Raiborn
- A comprehensive book providing in-depth knowledge about cost accounting standards and practices.
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Management and Cost Accounting by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, and George Foster
- This book covers key concepts in management and cost accounting.
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Principles of Accounting Volume 2: Managerial Accounting by Mitchell Franklin, Patty Graybeal, and Dixon Cooper
- A textbook that provides clear explanations of managerial accounting concepts, including cost standards.
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Horngren’s Cost Accounting: A Managerial Emphasis by Srikant Datar and Madhav Rajan
- Focuses on the managerial implications of accounting standards and practices.
Accounting Basics: “Normal Standard” Fundamentals Quiz
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