{"id":30955,"date":"2018-07-27T20:20:19","date_gmt":"2018-07-27T20:20:19","guid":{"rendered":"https:\/\/www.dvirc.org\/insights\/still-feeding-your-grandfathers-standard-costing-system\/"},"modified":"2023-03-08T14:05:40","modified_gmt":"2023-03-08T14:05:40","slug":"still-feeding-your-grandfathers-standard-costing-system","status":"publish","type":"post","link":"https:\/\/www.dvirc.org\/insights\/still-feeding-your-grandfathers-standard-costing-system\/","title":{"rendered":"Still Feeding Your Grandfather\u2019s Standard Costing System?"},"content":{"rendered":"

Full standard cost accounting systems with numerous variances have been around since the mid 1900\u2019s. Historically, inventory and production management personnel would take the whole month of December to calculate next year\u2019s standard cost for all raw material and finished goods. All variations in finished products for materials and labor would be totaled for the month, and 15 days after month end, financial and production managers would sit around to analyze the variances. Following numerous comments on what happened, they would look at the next month\u2019s variances.<\/p>\n

Sometimes variances were accepted as the new norm and standards would be updated to minimize variances (or the extended discussions about them). Adjustments to standards became more frequent to the point where standards were adjusted to avoid negative commentary.<\/p>\n

This level of standard costing differs from standards that are applied to operations on a routing where anticipated times are used to compare to actual labor effort. This use of \u201cstandards\u201d is essential to managing variation in actual performance that can be analyzed to derive continuous improvement opportunities rather than values that differ from the \u201cstandard.\u201d<\/p>\n

Proponents of standard costing systems also spend a great deal of time focusing on the under-absorption or over-absorption of overhead costs. Under-absorption of overhead costs really means that not enough product was produced\/sold to fully absorb the allocated overhead costs. Over-absorbed overhead costs means that more sales than was expected resulted in excess absorption of allocated overhead, generally a winning outcome.<\/p>\n

One way to offset under-absorbed overhead is to produce more (build more inventory), which is a terrible way to put company cash on the warehouse shelf but have better cost accounting results and less management whining. Over-absorbed overhead is a total victory that nobody wants to fix with any type of follow-up activity except \u201ckeep doing that.\u201d One can question the value of this absorption information if it is not used in support of continuous improvement activities that better the operations of the business.<\/p>\n

Why not keep everything simple?<\/strong><\/p>\n