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.

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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. 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.

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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 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…

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 used for external financial reporting, there are many rules that you must follow. You will need many long discussions with your auditors for this purpose.

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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 a standard cost be used?

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