Standard cost is a production management tool that represents a value set as a target for the company. It is used to plan and control its expenses, investments, operations, production performance, etc. It is used in comparison to the actual cost.
The value used for this indicator is determined based on expected spending. If your company pays more or less to produce a certain product or perform a certain productive activity, the difference indicates problems or opportunities.
Before continuing with the article, I want to make it clear that standard cost is a value set as a target, but it cannot be generated from idealizations alone. It is necessary to consider realistic cost calculations and values. Below, you can understand better.
What is standard cost? How does it work?
The corporation establishes a standard cost as a goal for its manufacturing expenses. It is outlined in the company’s planning and serves as a management tool. To determine whether or not the goal was met and why, the value is contrasted with the actual cost.
For example, let’s say you have a dairy industry. Together with your fellow managers, you decided that this month you would only spend 3 on fruit for every x liters of ice cream and entered the information into your ice cream factory ERP .
The following month, you opened your financial dashboards that provide real-time data. The tool shows that you spent R$5 on fruit for every X liters of ice cream. Then, using your Industrial ERP tracking tools and documents , you identify what led to the unplanned expense.
Now, it is up to you and your collaborators to calculate the variation, investigate the causes of this variation, what could have been done differently, if the error was in the planning, etc.
NOTE: STANDARD COST IS NOT DEFINED BASED ON GUESS. It is necessary to collect product engineering data and direct and indirect costs to define this value.
Standard cost types
Standard cost, as a tool, can be applied in different ways and contexts. Due to its variations, it is conventionally separated into 3 types according to this applicability.
Check out what they are:
- Current standard cost: is the most realistic estimate (compared to the ideal) considering average production efficiency, considering acceptable levels of waste and inefficiency;
- Estimated standard cost: an even more realistic forecast that takes into account normal variations in production efficiency and raw material costs;
- Ideal standard cost: this is the estimated value for ideal situations, that is, when production, logistics, acquisition, and everything occurs as expected – it is difficult to achieve, but it should be your guide.
Benefits of standard costing
- Helps plan the company’s production expenses;
- Facilitates comparison between the planned value and the actual value spent, allowing analysis of variations;
- It works as a management support instrument, integrated with planning;
- Allows you to identify problems and opportunities when there is a difference between the planned cost and the actual cost;
- Allows control of investments, operations and production performance;
- It can be used as an indicator of operational performance, when compared with real results;
- It serves as a cost target to guide production.
- Enables the use of digital tools, such as ERP, to track and understand cost variations.
Challenges when implementing standard costing
Standard costing is a tool that offers significant advantages for a company’s PODC (Plan, Organize, Direct and Control) in terms of expenses and production. However, like any management tool, it can bring obstacles to its implementation. All of them can be solved and I will show you each one below:
- Lack of knowledge about production: managers who do not know their own operation properly and the factors that surround it, such as the raw materials market, will have difficulty in establishing standard costs, as their expectations will tend to be disconnected from reality;
- Inadequate analog or digital tools: spreadsheets or paper and pen place extremely tight restrictions on data visualization and expense control, making it impossible to control actual spending in order to draw comparisons as well as realistically stipulate standard spending;
- Resistance to change: implementing new KPIs in a company means implementing new challenges, and your leaders and employees may be resistant to the scenario that arises. Encourage and offer training and professional qualification so that they can meet their goals for the new performance indicator.
Standard cost characteristics
- It is a production management tool ;
- Represents a value set as a target by the company;
- It is used to plan and control :
- Expenses
- Investments
- Operations
- Production performance;
- It is defined based on expected spending ;
- It is stipulated in the planning , objectively (“in pen”);
- It has three types :
- Current standard cost
- Estimated standard cost
- Ideal standard cost
- It is composed of variables such as raw material, labor and CIF ;
- It is used as a spending target , not as an average or common practice;
- Its variation indicates problems or opportunities ;
- Its implementation may face challenges such as:
- Lack of knowledge about production
- Use of inappropriate tools (analog or incomplete)
- Resistance to organizational change
How to calculate standard cost? What is the formula?
The standard cost is not an “obtained” value, but rather one determined by the manager and there is no single formula, because each resource (raw material, labor, etc.) has its variables, despite a common base.
The calculation is performed in this way when considering all the resources committed:
standard cost of production = standard quantity of resource per unit × standard cost per unit.
