Standard Costing seems to be an challenging issue for may Enterprise Resource Planning (ERP) customers I see. I have been implementing different ERP packages for over 15 years and it’s amazing how differently each system transacts costing data. The only thing I can say for sure is that I have not seen two systems work the same in regards to this area.
At IQMS, we tell our customer’s to be certain and have all needed data setup correctly when it comes to evaluating Standard Costing. Bills of Material (BOM) are one of the biggest areas of concern. Cycle times, scrap percentages, labor requirements, part weights (including excess material weights), and the number of components required will all affect variances. In addition, purchase costs of materials consumed will also cause variance and is important to consider.
Most customers want to implement Standard Costing when they go live with EnterpriseIQ. Believe it or not, at times, we have recommended holding off on the first month or so - especially if they have never before used Standard Costing. The main reason is simple: if information is not accurate (and we all know that new users make mistakes when entering production/purchasing information) it will reflect on your financial reports.
In my opinion, the biggest upside to Standard Costing is the visibility to truly see variances and thus evaluate areas of concern before the end of the month. Attempting to resolve issues thirty (30) days after the fact is really too late to make effective change. You need to be aware of variances as soon as possible so the root cause can be determined and a solution can be put into place. Variances can be due to any number of things and getting those issues under control might mean changes in material, overhead, or labor.
When processing Standard Cost items within EnterpriseIQ, variances are reviewed prior to General Ledger posting. This allows for analysis of information that be reviewed directly with all levels of operations to resolve in a timelier manner. This pre-posting review also allows changes and fixes to be entered so data can be reprocessed before posting to the General Ledger.
Here is a perfect example of what to look for if a Standard Costing overhead variance of $5,000.00 against a single inventory item (from a single production shift) is found:
- Review the production report for that day and note the total amount of parts produced and the total number of production hours. Do these hours calculate to what the BOM suggests?
- Are bad/reject parts being produced in greater numbers than anticipated or planned?
- If entering production statistics manually, is incorrect data being entered? (Note: IQMS RealTime Machine Monitoring module eliminates this manual step because it gathers data directly from shop floor machines.)
More and more IQMS customers are utilizing Standard Costing for the sole purpose of capturing their variances. This can allow for process improvements before it’s too late. Profitable companies always want to know what parts are costing more than estimated. Standard Costing is the resolution!