Archive for the ‘Standard Cost’ Category


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 […]

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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 […]

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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 […]

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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.

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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. […]

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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 […]

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Standard Cost: Overhead Absorption and the 800 Pound Gorilla

Standard costs and particularly overhead absorption have drawn fire from many who use problems in this area to promote their own “solution”. But let’s examine what is really going on here.

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Standard Cost: Which Costs To Use As A Standard?

There is no single answer to the question, “Which costs should we use as a standard?” If you are setting a standard solely for internal management decisions, the answer is very broad. Internally, management can use anything it wants that would contribute to effective management. However, if you are setting a standard that will be […]

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Standard Cost: Where To Use A Standard?

To answer the question of where to use a standard, it helps to look at examples outside our own situation, company, or industry. At times, we put ourselves inside a self-imposed box and stop thinking for ourselves. Let’s look at an example far from our current question.

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Standard Cost Versus Actual Cost: Which is Best?

Many consultants promoting their particular methodology take aim at standard cost. Standard costs seem to take the heat for “All that ails” modern business. However, standard cost has a role in management’s tool box. Not as the only tool for all situations but it is the right tool for the right jobs. So when should […]

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