Product Costing for Standard Costing
To remain competitive in a changing business environment and to reduce the costs that are passed along to the consumer, companies must be aware of all aspects of their business and look for ways to refine operations to reduce lead times, expedite speed to market, and reduce the cost of operations. All of these processes help the company to be more flexible so that it can respond to changes in customer demands and to maintain or improve its market share.
To reduce costs that you incur as a part of conducting business, you must understand where costs are generated. For production industries, you must break down product costs into each contributing factor that influences the ultimate cost of the manufactured product. You should track not only the cost of the individual item, but also each additive feature or activity that adds cost to the end product or increases the value of the product.
Numerous activities or processes might add costs to the product. You should have processes and tools in place to identify each component of cost. You must also understand how those incurred costs might be passed along to customers.
As the company refines its production processes and automates costing activities, you should create detailed definitions of the costing processes. Ensure that the cost techniques support any manufacturing method that you use. Often, a company wants to decrease the lead time that is required to maintain and monitor product costing information throughout the entire manufacturing process. More accurate costing information enables you to identify wasteful costs and to lower costs that must be passed along to the consumer or that are absorbed. The goal is to increase the company's revenue and improve profit margins.
Product costing plays a significant role in the manufacturing environment. If you use standard costing, you must set up costs for the products that you produce before you can implement the JD Edwards EnterpriseOne Manufacturing Accounting system.
To calculate these costs, you must consider these aspects of the manufacturing environment:
Product costing (detailed information) for material, labor, and overhead.
Cost reporting (what does the item really cost to produce).
Variance reporting (actual versus standard costs).
To use standard costing, you specify cost method 07 for the item and branch. After you calculate the cost component values in a simulated mode and are satisfied with the results, you must establish frozen standard cost components. All shop floor transactions use these frozen standards for cost calculations which, in turn, generate transactions in the general ledger and are the basis of the inventory valuation.
Standard costing is most applicable for a company with stable costs and little cost variance from one manufacturing run to another. Companies with minimal accounting staff often use standard cost accounting.
With standard costing, you estimate costs for each end item assembly and manufactured part on a level-by-level basis before production begins. These cost estimates are based on both past performance and analysis of future conditions.
This table shows the differences between components of net-added cost and total cost:
Net-Added Cost |
Total Cost |
|---|---|
Costs include:
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Costs include:
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The net-added cost represents the cost to manufacture an item at a specified level in the bill of material. For manufactured parts, the cost includes labor, outside operations, and extra costs, but not materials (lower-level items). For purchased parts, the net-added cost includes the cost of materials. The total cost of an item represents the sum of the item's net-added cost and the total cost of all components.
By defining and monitoring standard product costs, you can measure the company's current manufacturing performance and compare it to the standard (target) costs. Product costing provides information about the monetary investments in the materials, work in process, and physical inventory. You can use this information to determine pricing for end items and service components.