How do you compare actual and standard costs?

Standard cost serves as a predetermined benchmark for the cost of a unit of production, while actual cost represents the real expenses incurred during the manufacturing process. Comparing the two enables us to identify variances, fine-tune the production steps, and improve overall efficiency.

Standard cost is kind of tool where data are being consider to get as probable landed cost whereas actual cost is consists by generating result of certain distinguised products or services !

In a certain way you need to measure how’s your manufacturing or operation performed. Standard cost analysis is a tool to measure the cost performance during certain period compared a set of cost assumptions that settled before. Cost Variance (Act vs Std Cost) would be occurred. During analysis at least you would have these points: - How efficient your organization in term of cost - How good your organization anticipates situations that affect your cost

Adding to what has already elaborated. Standard Cost - Summation of Optimised Raw Material Cost + Manufacturing process + Overhead+ other applicable factors of logistics . All of these which are already proven else if hypothetical it is Target cost. Actual Cost - As name mentioned actual cost booked of similar or additional parameters mentioned above.

Standard costs shall be used to decide whether the project will be launched while actual costs will be used to waste reduction and process optimization, etc.

First, agree on what materials, labor, and overhead are. Ex. Is the tape used to seal the box a material? How about the shrink wrap? Ex. Is the material checker part of labor? How about the person doing some minor rework at the end of the line? Ex. Is Quality Assurance part of overhead? How about the person who bought the materials? Ex. Do you use OEE1 or OEE2? If several machines can run a product, do you use a weighted average or the best case? ... And much more.

Standard costs must be adjusted as time goes by since the basic elements in the calculations will be changed. The factory accounting function is responsible to do so.

When historical data is used to establish standard costs, it must be taken into account, among other things, that the measurement systems used are currently valid, and that extreme data that does not correspond to the average situation is not included. Care must also be taken if, during the historical period, improvement plans or changes in the process have been implemented that may have affected the result.

Sure,Standard costs can magnify projected cost rises when such increases are anticipated. In numerous cases, expenses tied to energy and production exhibited evident upward trajectories, even though they weren't explicitly noted as risks.

When comparing current costs with standard costs to evaluate a production process, it is very important to set the period for which the comparison is made, ensuring that in the indicated period, the elements to be compared are homogeneous and no spurious changes are introduced due to outside changes. of the production system, such as changes in raw materials or suppliers. It is also very important to provide clear information on the composition in ratio or price of the variances. It is also necessary that the measurement system is audited and that there is a metrology plan that guarantees the reliability of the measurements made in the production process.

When pertinent data is accessible, the most straightforward approach involves incorporating analytical AI tools to handle the task. This method proves highly beneficial, particularly for tasks requiring visual comparisons.

Always put notes. E.g. Electricity rates may vary by time, i.e. It may be cheaper to run a machine in the evening than day shift. You might be misled to think it is more efficient at night. E.g. Was there a product changeover? Running two batches might be the reason for lower costs and not because the labor was more efficient. They were producing rather than cleaning and setting up the machine.

In the first place, because it is necessary to guarantee that the sale prices reflect the real costs of production, and not the costs that we would like to have in an ideal way. Once our standard costs are adjusted, the analysis of variances allows us to determine where the main deviations occur, so that priorities can be established in continuous improvement plans.

Don't lose sight of the big picture. Sometimes having unfavorable variances need to be incurred because the company will still come out ahead. Ex. Running overtime and paying the labor premium due to a rush order versus giving up the volume to a competitor.

In setting standard cost for materials, there is many variables to consider. I like to work with zero based cost I.e. actual cost and then use factors that can influence future cost. For example take into account economic factors, commodity price movement, shipping and transport cost, ROE and other factors that can influence price like energy costs. I also like to look at the trend of material pricing over a period as it will been seen that there is certain factors that influence price I.e. supply and demand. Standard costing is a science and needs to be approached correctly on materials as in the end it can either influence your sales cost positively or negatively. Also monitoring cost (PPV) and adjust if and when necessary is important.

One thing that i have found useful when comparing actual cost versus standard cost in a production setup is through analyzing actual output vs set targets. Example shop floor need to know the cost implication of not achieving the targets and how it affects the employees and the company. Analysis of variance reports on a daily basis helps production supervisors and managers to keep track of their efficiencies and cost.

In my experience, a great many people expect the whiz-bang software to do all the work. They don't set things up right to get the most out of their software because in many cases the manufacturing or product line managers are unprepared to answer questions about how to enable or disable software features that affect the information stream. My favorite example of that is trying to get any meaningful short- to medium-term information about the efficiency trends in custom product manufacturing when it is jammed into a standard costs/repetitive manufacturing framework because "this is the software we invested in and this is how we are going to do it." a/k/a The tail wagging the dog.

The analysis of variances must be done with a deep knowledge of the production process. Automatic numerical analysis must be avoided, it is necessary that the information obtained be useful to improve knowledge of the production process. Analysis tools are worthless if you don't know the production process.