Usually, effective standards are the result of engineering and time and motion studies undertaken to determine the amounts of materials, labor, and other services required to produce a product. General economic conditions are also considered in setting standards because these conditions affect the cost of materials and other services that must be purchased by a manufacturing company.

Businesses can use standard costs as a baseline in the benchmarking process. Companies want to know whether their manufacturing processes are as efficient as possible and whether each item or service they produce is of the highest possible quality. Business leaders use benchmarking to study these issues systematically.

Benchmarking means measuring the quality of a company’s products, performance, or processes against specific standards. It is an essential process for companies that want to improve their products and services.

A benchmark is a standard of performance that companies or managers measure against. Businesses use many benchmarks, which may come from the company’s past performance, a rival’s performance, industry standards, and/or government regulations. A benchmark may be a specific line item cost or a cost for an entire process. For example, our guitar body manufacturer might have cost standards for the price of a foot of wood or for the total cost of production for one body.

The standard quantity of materials used in making a product is largely a matter of physical requirements or product specifications; therefore, the engineering department usually sets that standard. However, since the quality of materials used usually varies with price, the accounting and purchasing departments often work with engineering to find the right combination of quality and quantity. In addition, sales and marketing can get involved, since a lower quality product can eventually negatively affect the bottom line unless the company is marketing a very low-cost product that may not focus on quality.

In developing standards, management must consider the assumed conditions under which these standards can be met. Standards generally fall into two groups—ideal and practical.

A company attains ideal standards under the best circumstances—with no machinery problems or worker problems. The company can attain these unrealistic standards only when it has highly efficient, skilled workers who are working at their best throughout the entire period needed to complete the job.

Practical standards are strict but attainable standards that have allowances made for machinery problems and rest periods for workers. Companies can meet these standards if average workers are efficient at their work. These standards are generally used in planning.

Generally, management does not use ideal standards in budgeting because a company rarely runs its operations under ideal conditions. Instead, management uses practical standards in planning because these standards are more realistic, allowing for machinery repairs and rest periods for workers. Any variances that result when practical standards are used indicate abnormal or unusual problems.

Let’s assume that Boulevard Blanks expects each guitar body to use exactly four board feet of lumber. The board foot or board-foot is a unit of measurement for the volume of lumber in the United States and Canada. It equals the volume of a one-foot length of a board, one foot wide and one inch thick. Board foot can be abbreviated as FBM (for ‘foot, board measure’), BDFT, or BF, or sometimes 1/12ft³. A 20.5-inch long blank is cut from a laminated board that is 2 inches thick and 14 inches wide, which is 3.986 board feet (Length x Width x Thickness divided by 144 cubic inches). A worker marks the guitar body on the wood, cuts it out with a band-saw, carves out holes for the electronics and the neck, and sands the finished product to its finished dimensions, ready for shipping. Engineering studies and efficiency experts have developed systems that allow a single worker to produce 20 guitar bodies in 30 hours, so the expected (standard) labor hour standard is 1.5 hours for each body.

Before we start using these standards to direct, monitor, and control costs, check your understanding of the standard-setting process.