Many manufacturing companies choose a valuation base of standard
cost. A standard cost system is one in which inventory unit cost is
determined based on some reasonable historical or anticipated cost.
In this way, studies of past and estimated future cost data provide
the basis for standard costs. These costs are frozen until a
decision is made to change them. Unavoidably, the actual cost to
manufacture a product may differ from the estimated standard costs.
For management control purposes, the actual cost is compared to the
standard cost for a specific item and differences (variances) are
identified and analyzed.
Standard costs can be developed for both purchased and
manufactured items. The standard cost for purchased items consists
of only material costs (direct and, if required, overhead), and the
standard cost for manufactured items may consist of the direct
material costs, such as labor and capacity costs, direct
manufacturing costs, subcontractor costs, and overhead costs.
Setting up Standard Costs
Because the standard cost of a manufactured item consists of
multiple cost elements – material, capacity and subcontractor
costs (direct and overhead) – standard costs must be developed for
each of these elements.
The accounting task for a manufacturing company using standard
costing is twofold:
To estimate a standard cost for
a finished item and set it up in the program;
To record and allocate the
actual cost of the manufacturing cost elements, and properly
account for variances.
To determine the real cost of a finished item, all the component
costs must be totaled. It is not uncommon that an item may include
subassemblies, which in their turn also consist of multiple
components.
The following are the three key cost elements that make up the
manufacturing cost of a finished item: material costs, capacity
costs, and subcontracting costs/manufacturing overhead.
Material costs are costs associated
with subassemblies and purchased raw material. Material unit cost
may consist of direct and indirect cost elements. Direct material
cost represents an invoiced amount for purchased raw materials or
the manufacturing cost of a subassembly. Indirect material cost (or
overhead) may, for example, represent inventory carrying costs for
the finished item, once produced.
The setup of the material cost for
purchased items with regard to direct and indirect cost depends on
the costing method selected for the item in question. Irrespective
of the costing method, the cost information is set up on the
Invoicing tab of the item card.
The cost of scrap is an additional
factor in the total material cost that must be taken into
consideration. When a certain amount of raw material is scrapped in
the process of making or manufacturing an item, it generally
results in an increase in the quantity of components needed to
produce this item. In turn, this increases the material cost of the
components consumed while producing a parent item. Scrap cost for
materials can be set up on either the production BOM or
routing.
The material cost of a manufactured
item can be represented in two ways that correspond to the two
standard cost calculation bases: single-level and rolled-up (or
multi-) level. If the single-level basis is assumed, then material
cost of a manufactured item is equal to the total cost of all of
the items (purchased or subassembled) on that item's bill of
material.
In a rolled-up level calculation, the
material cost of a manufactured item is the sum of: 1) the material
cost for all subassemblies on that item's bill of material, and/or
2) the cost of all purchased items on that item's bill of
material.
The program provides two reports:
Single-level Cost Shares and
Rolled-up Cost Shares. These
reports present the item's cost calculated on single-level and
rolled-up calculation levels, respectively. In addition, a Detailed Calculation report creates a
cost list per item taking into account the scrap.
Capacity costs are the costs
associated with internal labor and machine costs. These costs must,
therefore, be set up for each machine and internal work center on
the routing. As with materials, companies may identify both direct
and indirect elements of capacity cost. For example, the direct
cost for a work center may be the established "shop rate" to
perform a specific function. The indirect cost for a work center
may represent some general factory expenses, like lighting,
heating, and so on. Similar to material costs, capacity
overhead may be expressed as an indirect cost percentage and/or a
fixed overhead rate.
The setup of the capacity costs
consists of the following elements:
unit cost (direct and indirect)
time and lot size setup
To calculate standard capacity cost,
a manufacturing company needs to establish the standard time rates
necessary to perform operations on machine and work centers. The
total time to complete an operation typically consists of setup and
run time, as well as wait and move time.
The rates for each of these time
types are set up for each machine/work center on an individual
routing.
It is important to note that while
run time rates apply per item unit produced, the setup time rates
apply per lot. Therefore, the routing setup time for each operation
must be pro-rated over the lot size. The lot size is specified in
the corresponding field on the Ordering tab of the item card.
Some companies may want to specify
setup time on the routing for planning purposes, but not include
this expense in the standard cost calculation. This is done by
removing a check mark in the Cost Incl.
Setup field on the General tab in the Manufacturing Setupwindow.
On a single-level, this is the labor
cost required to manufacture the finished production item and is
specified on the production item's routing. On a multi-level, this
is the capacity cost specified for each individual manufactured
item included in the parent item's BOM.
Subcontractor costs are the costs
associated with services provided by a company's outside vendors or
subcontractors. Similar to material and capacity, subcontractor
costs may consist of both direct and overhead amounts. Direct
subcontractor cost represents the actual charge per unit of
services provided. Overhead subcontractor cost may, for example,
represent freight and/or handling costs incurred by the company in
connection with a subcontracted order.
As subcontracting is in essence an
out-sourced capacity, the cost of subcontracting services (direct
and indirect) is set up on the work center card representing the
subcontract operation.
Updating Standard Costs
The process of updating (adjusting) standard costs would
typically consist of four task groups:
Consolidating and rolling up the component
and capacity costs to calculate the total manufacturing cost of the
items. This is done using the Roll Up Standard Cost batch
job.
The standard costs entered by running the previous batch jobs do
not take effect until they are implemented. You do this by running
the Implement Standard Cost Changes
batch job.
Implementing the changes in the program in terms of updating the
Unit Cost on the item card and
performing inventory revaluation. This is done using the
Revaluation Journal.
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Material Costs