Go Standard for Product Costing

Manufacturers would probably prefer it if their cost structures were fixed and predictable. For this reason, standard costing is appealing to many manufacturers. 

With standard costing, specific values are assigned to each finished product based on material components, labor and other direct and indirect overhead costs. Each component comprises the product’s standard cost, and the gross profit margin is easily determined by subtracting the standard cost from the selling price.

In this Automation World article, Shawn Parker, Weaver’s partner-in-charge of Dallas assurance services, shares an example from an aluminum plate manufacturer:

The aluminum plate costs include the price for the aluminum along with the labor used to produce each plate. Direct overhead items, including depreciation and repairs on the equipment used on the production line, need to be factored in, along with indirect overhead items such as general administrative costs. Indirect costs also include fixed expenses, such as rent and financing for the facility, and variable expenses like monthly utilities.

By using standard costing techniques, the manufacturer can more efficiently measure the cost of production, allowing for more effective budgeting and price setting for future projects. However, when using standard techniques, the costs still have to be compared to actual costs on a periodic basis—ideally each month but at least quarterly. The current cost review is particularly helpful when a company prepares interim financial reports.

To read the full Automation World article about standard cost methods, click here.