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Standard Cost

Hi, i am looking for setting up the cost standards for manufacturing company. I am interested to see what companies are doing in order to do that? Mean, what is the base for the standard? I am looking for better way than a weighted average of actual cost in the last 12 months. (currently in use) Are you familiar with something more accurate than above? I have to add that the company is pretty large (10k +of skus in inventory) and a ots of new product development, means parts constantly are going form prelim to final modes.(then the cost is much different) thank you

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Standard cost is based on several factors. RM, DL + OA. Then one must to a time study to determine how much DL is added. A realistic OA formula needs to be used, as well as the OA rate.

That being said, there is no magic "pill". It takes time to do the time studies.

Anonymous
(Accounting Leader) |

understood, thank you Wayne
my question was more about raw material, but i see i was not specific about it
but i am also interested about finished good as well
i am looking for real life example if anyone have it
thank you in advance

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Standard costs for RM. That would be surveying vendors and selecting a value that is representative of the cost. Somewhat difficult in rising markets (leads to large changes in year-end adjustments).

Note: price variance could be a factor of ordering quantity and/or freight-in (rush orders) which could lead to incorrect assumptions.

Anonymous
(Accounting Leader) |

thanks Wayne!

Topic Expert
Bob Scarborough
Title: CEO
Company: Tensoft, Inc.
(CEO, Tensoft, Inc.) |

Ideally standard cost is your planned cost. History may show you the plan if the future will be the same as the past. Otherwise it is better to estimate future costs (materials, internal cost allocations, scrap/yield factors).

If you use standard cost as your planned cost, you then view the variances as deviations from the plan. A partnering model with your operations / manufacturing team would lead finance to regular meetings with that team to review deviations from plan and where future cost is heading.

Jack Judd
Title: Retired
Company: Retired
(Retired, Retired) |

This may be silly, but do you really have 10,000 sku's that are "manufactured" or are many of the sku's purchased products that do not have labor added in a manufacturing process? My first suggestion is to analyze which products need to have standard costing applied. Also I agree with a comment from above that cost studies will need to be done and evaluated to see that they work. Expect that it will take time and that it will take several iterations to get it right. Finally, consistency of rules in costing is the most important. Sooner or later everything will flow through the income statement so keep the balance sheet impact of costing forefront.

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