USA Benefits of updating standard cost


JR.

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A question came up during an operations finance call regarding updating standard cost. Plants are hesitant to update standard cost when they get a benefit in their P&L in the form of a favorable process variance. Essentially, this is reduced cost not in the standard and should belong in DCOGS. If standard costs are updated, the credit moves from OCOGS to DCOGS and improves margins. The plants argue "why lose this credit in the sites P&L"? My theory is matching a standard cost with an actual cost should reflect more efficient use of resources, therefore, the freed up resources should be eliminated if they will not be utilized, or be utilized elsewhere to improve throughput.

Any ideas, suggestions, arguments, or information I can provide to the operations team, so they dont feel as if they are losing out on a benefit?
 
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Werner Reisacher

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The setting of standards in a manufacturing environment has two purposes. System Engineers are trained to set standards for processes that are realistic but also include an incentive for the operators to "beat the standard" - resulting in a higher income. The second purpose is for the monitoring and assessment of the productivity of the operation. '
The accountant's job is to carry out his duties in line with the policies and procedures outline in the Standard Cost and/or Accounting Manual of the Company. The accountant follows the rules and reports the findings. He is not calling the shots. It is up to the CEO of the company to make the judgment call how rules are applied. Do not fall into the trap and spend the better part of each meeting with operations to argue about the principles of a Standard Cost System. Since the longer, you allow those operators to question you, the less time is left discussing the reasons that have led to the variances and how productivity can be improved. A task that operations most probably also have in their job descriptions.
 

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