Standard Cost Management
Standard cost management is a process for controlling labor, material, and overhead costs for producing manufactured goods or providing services. The process includes setting predetermined standards for cost elements, monitoring actual costs against those standards, and taking corrective action.
Standard cost management is a proactive approach to cost management. It focuses on managing cost before the costs are incurred, setting budgeted amounts and baselines to against which actual results are compared. The goal is to identify opportunities to improve efficiencies and actions to achieve desired results.
The process of standard cost management begins with setting predetermined standards or budgets as to what suppliers, labor, materials and overhead costs should be. The standards should be based on historical costs, estimates and the expected cost of marketing, sales and production. The standards should be documented and communicated to employees and management.
Once the standards or budgets have been established and communicated, the actual costs can be monitored against the standards. The actual costs are reported and monitored on a periodic basis, such as weekly or monthly. Actual costs should be analyzed for any deviations from the standards and take corrective action when necessary.
The actual costs also should be compared to the budgeted costs. Any significant deviations from the budgeted costs should be further analyzed to determine underlying causes and targets for corrective action.
Standard cost management also involves the identification, analysis, and correction of inefficiencies or “waste”. This is accomplished by analyzing processes, activities, tasks, and procedures to identify areas of inefficiency in labor and material utilization, and productivity. Once identified, corrective action can be taken to reduce labor and material costs and improve productivity.
Standard cost management can also mean monitoring supplier costs. As costs are negotiated with suppliers, management should be comparing them to the standards and ensuring that suppliers are meeting the budgeted costs. In addition, management should be monitoring supplier performance and quality of products being delivered.
Standard cost management can be an effective way of controlling cost in a manufacturing or service setting. It enables management to identify and address cost inefficiencies and target specific areas for cost reduction and improvement. However, it must be noted that for it to be effective, the process must be actively managed, with results monitored and appropriate corrective action taken when necessary.
Overall, standard cost management can be an effective tool in the overall cost management framework. It is important to understand the process, set predetermined standards, and actively manage the process to ensure desired results are achieved.
