More Than One Standard for a Job
Apr 14, 2014
I was reading an article the other day about businesses that have multiple standards for the same cost band for the same exact job. This discussion was not related to multiple costs for the same product, which I think is essential in today’s business environment, but rather, why a business might need more than one standard for the same item in a products bill of materials. The concept that a business might use more or less of one resource in the manufacturing of a part has always presented an interesting quandary in management accounting theory.
The way I see this occurring most frequently is related to the same part that can be run on different machines. A company might have the same exact part that can run on the latest, most productive, most highly efficient machine in the shop and it also can run on the slowest, least productive, oldest piece of equipment in the shop. The company has the tooling it would take to run it on either machine and the quandary facing the cost accountant is how do I cost that part. Does he or she cost the part based on always running it on the most efficient machine and then when it runs on the slower machine it does not prove to be as profitable. Or does the cost account cost the product to run on the slowest machine, then when it runs on the faster machine it is more profitable than when it runs on the slower machine. I’m sure there’s abundant management theory on how that costing analysis should be completed but my advice has always been cost the product on the machine it is most frequently scheduled to be produced on. In doing this you will be costing the product with the highest degree of reality.
This article that I was reading is actually oriented more towards the purpose for having different standards for the same job. They mentioned material and how there might be a use for more than one standard on material usage. I find that to be somewhat quizzical in that raw material usage is usually a very defined quantity with clearly defined costs.
My only thought on that process is that perhaps in the company’s inventory of raw material there is more than one type of material, with differing cost of course, that can be used to make this part. Accordingly one type of raw material will be at a somewhat greater or lesser quantity than another type of raw material simply because of the different types of material that are being used.
Irrespective of the nature of the cost system that you use, I believe every cost system somewhere has a standard cost sheet or a bill of materials that represents the normal usages and costs of the product that is being produced. The fact that there may be multiple standards for the same product with the same raw material going through the same process seems to me to be difficult to administer and must be the result of very specific needs in the company with the desire for very specific output at the time the jobs are being analyzed.
Categories: Cost Accounting