What is Standard Costing?

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ArmaninoLLP Welcomes You To Today’s Webinar:How to Use Standard Costing to Increase Profitability

The presentation will begin in a few moments

Participants will receive an email within 3 business days with access to their certificate of completion.

2 © ArmaninoLLP | amllp.com

About the Presenters

Scott Copeland, CPA, Partner, Audit• Over 23 years of experience in both public and private

accounting covering a variety of businesses and organizations

• Began career at Deloitte & Touche, San Francisco; with Armanino since 2002

• Member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants


About the Presenters

Eric Greathouse, Senior Manager, Consulting• 15 years of ERP implementation experience, focusing on

Manufacturing and Finance • Leads our Dynamics AX Financial consultants• Joined Armanino in 2004• Certified in Microsoft Dynamics AX & GP


Learning Objectives

During today’s webinar, participants will:• Define standard costing • Identify variances and how they are used for

strategic decision making• Discover a standard costing software tool that is

available • Measure the quality, timeliness and accuracy of

standard costing information


Presentation Overview

• What is Standard Costing?o Establishing a Baseline Understandingo Inventory/Cost Valuation Principalo Typical Automated Standard Costing Structureo Advantage of Standard Costing

o Development of Standard Costs

• Standard Cost Varianceso Variance Typeso Variance Pathso Posting Controls

• Analyzing Data and Tools Usageo Gotcha’s in Setting/Reviewing Varianceso Employ Effective Tools – The Holy Grail


What is Standard Costing?


Inventory/Cost Valuation Principle

• Budgeted amount for single unit of output• Computed in advance of actual production/purchasing process• Uses specifications and elements required to construct or purchase

an item (Bill of Materials, Routing)


Inventory/Cost Valuation Principle (continued)

• Costs are comprised of material, labor, machine, overhead, subcontracted items, services

• Actual performance is used to measure against the standard, thus favorable or non favorable variance metrics

• Site or entity specific


Typical Automated Standard Costing Structure

Source: Microsoft


Advantages of Standard Costing

• Value inventory• Budgeting• Product pricing• Forecasting• Management by exception


Development of Standard Costs

• There are a number of assumptions to consider when deriving standard costs, which include:oEquipment configurationoProduction volumeoEquipment conditionoProduction systemsoUnion negotiationsoTraining and experience


Standard Cost Variances


Definitions of Variance Types

• Purchase price – Difference between cost used for standard cost calculations and actual receipted off purchase order

• Labor – Difference between units/burdened rate used for standard cost calculations and actual time incurred to produce


Definitions of Variance Types (continued)

• Overhead – Difference between fixed/variable rates used for standard cost calculations and actual direct and indirect expenses incurred

• Substitution – Difference between components/operations used in standard cost calculation and actual consumption transaction


Definitions of Variance Types (continued)

• Quantity – Those amounts used in standard calculation on BOM’s and actual consumption transactions

• Lot size – Difference between standard cost calculation quantity and production order quantity


Standard Costing Variance Path


Standard Costing Variance Path (continued)


Standard Costing Variance Path (continued)


General Ledger Postings

• 8 Variance Types:o Purchase Priceo Inventory Cost

Revaluationo Cost Changeo Production Lot

Sizeo Production Priceo Production

Quantityo Production

Substitutiono Rounding


Standard Costing Posting Controls

• Purchase Price Variance (PPV) can be split based upon item groupso Rawo Finished Goods

(FGI)o Sub Assemblyo Floor Stock


When to Update Standard Costs

In a standard costing system, most companies go through a cost updating process at least once a year, in order to bring standard costs more closely in alignment with actual costs.

Options to consider:

• Scheduled update• Selective increased frequency• Review when trigger activated


Is Standard Costing Allowable in GAAP and IFRS?

• Both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require that an entity report its actual costs incurred when reporting expenses.

• As long as material variances are recorded, there is no material difference between actual and standard costs.


Analyzing Data and Tools Usage


Gotcha’s in Setting Standard Costs/Analyzing Variances

• Purchase price• Production• Substitution


Purchase Price

• Do not just use last purchased cost to set standard as it may be anomaly due to size, market conditions, rush, etc.

• Look at purchase trends by item or item group, use predictive analysis to make new price determination

• Involve vendors, make them commit through hard negotiation and quoting


Production

• Make sure some engineering study is done to set run rates, no swags

• Institute mandatory reason code usage and analytics to determine the “why’s”

• Involve engineering if the issue appears to be design/machine not operator


Production (continued)

• Get on it early, don’t let the quantities build and the unfavorables kill your margin

• May not want to allow backflushing and kanbaning of all material overages


Substitution

• Parts, work centers, routings –systematically control what is allowable on the floor. Think warranty repairs as well as variance.

• In a normal course of business due to capacity fluctuations, material issues, plan on the expected


Employ Effective Tools – The Holy Grail

• Reports with “drill down” capabilities

• Business Intelligence hooked into costing system

• Dimension GL by product lines of business

• Difficulty to access and analyze data = failure/poor margins

• Set up detailed COGS/Variance section of GL


In Conclusion…

During this webinar, we’ve:

• Established a baseline understanding of Standard Costing

• Discussed the importance of striving to automate variance postings in real time

• Described how you can use variances to make strategic operating decisions at your company that will improve profitability


What Questions Do You Have?Submit Your Questions Now!


ArmaninoLLP

Scott Copeland, Partner, Audit phone: 415.568.3286 email: [email protected]

Eric Greathouse, Senior Manager, Consulting phone: 925.790.2839 email: [email protected]

Participants will receive an email within 3 business days with access to their certificate of completion.

Documents

What is Standard Costing?