Fixed and Variable Costs — The Dilemma
Back in my college days, the university required two courses in economics: Macro Economics and Micro Economics. It was hard to reconcile the two courses. What is hard fact in one was flakey in the other – and vice-versa. As a student it drove me crazy. Read More…
Budgeting for Standard Costs: Why Bother?
Recently I attended a conference addressing planning and budgeting. Most presenters and attendees wanted to reduce their reliance on formal budgeting processes. However, at lunch, I sat at a table with two attendees from one company. As our discussion evolved, they were worried about having to expand their budgeting processes. As this direction ran counter to the conference theme, I asked additional questions. Primarily, why were they expanding their budget process? Read More…
Financial Reporting versus Costing: Which is Right?
When attempting to calculate the cost of products and services, people often cite practices used for external financial reporting. Then they attempt to use these practices for internal decision making. Perhaps in an ideal world, this may be a valid path. However, we live in a world far from this ideal. In our world, external financial reporting and internal decision making are often in conflict. Why? Read More…
Customer Service: Nothing So Useless?
In recent years, I’ve observed a much needed trend toward better customer service and “Listening to the voice of the customer”. In general, I applaud this trend and support this goal. However, even a worthy objective does not prevent us from doing something stupid. Sometimes, an ideal, such as customer service, creates an environment where we do certain tasks very efficiently. But without the critical components, nothing could be so useless. Read More…
Production Control: Nothing So Useless?
According to Peter Drucker “There is nothing so useless as doing efficiently that which should not be done at all.” With developments in technology, we now have the ability to automate more processes than ever before. While I am an advocate of applied technology, another rule applies, “Don’t automate what you don’t need to do.” Indeed, computers can process more transactions and faster than ever before. But this very efficient processing may be quite useless. Read More…
Overhead Absorption: Nothing So Useless?
According to Peter Drucker “There is nothing so useless as doing efficiently that which should not be done at all.” Many companies give themselves credit with each portion of their production process. Many experts have pointed out that this practice motivates managers to build inventory in order to receive overhead absorption credit. Some of these experts use this motivational tendency to advocate scrapping entire systems in favor of their process. Read More…
Standard Costs: Why Do Standard Costs At All?
After the completion of my recent series on standard costs, a colleague complemented the series “except for the fact that it begs the question – Why do standard costs at all?” So, we’re not finished yet.
This is actually a very good question. If we go back to the beginning of this series, I observed that standard costs are simply a tool. Actually, they are only one tool in a toolbox that should be full of sharp powerful tools that we are comfortable using in circumstances warranting what each tool does best. Read More…
Standard Cost: Setting Stretch Performance Targets
When setting performance targets, is it best to stretch the target so that everyone has a lofty, almost unattainable goal. Many would say that this is the best way to drive quantum leaps in performance management.
Standard Cost: Setting Overhead Cost Standards
When it comes to setting cost standards, overhead is the biggest problem. Why? Today, aside from material costs, overhead is the largest component of product cost and the least understood.
Historically, overhead cost averaged 20% to 40% of labor cost. It was a minor consideration to product cost and was not significant in management decisions. Today, overhead cost may range from 400% of labor to thousands of percent of labor. Overhead is now much more significant to decision making. With this significance, a sloppy relationship tied to labor cost cannot be tolerated.
Standard Cost: Is Standard Cost A Key Performance Indicator?
Most manufacturing companies have a standard cost system. Their first motivation for this system is to simplify inventory valuation and tracking. Then with all the resulting information available from this system, it seems only logical to use it for key performance indicators or KPI’s. One indicator could be a product’s total standard cost; others could be variances recorded for material prices, scrap, labor rates, labor efficiency, and overhead. Variances are the differences between a standard and the actual costs or usage. Read More…
