Standard Cost, the base line:
Standard cost is not a new concept for any organization that manufactures a product. Doesn’t matter if you’re in the food & beverage industry, consumer products, pharma, or (insert your company name)…if you work on the production side of any of these industries, you’ve probably been exposed to standard costs. In a nut shell, standard cost is the budgeted amount of materials, labor and manufacturing overhead that is required to make the products you forecast to sell in a specific period of time. If your projected plan is to sell $40B annually in product(s) and your standard cost budget is $15B, then you’re planning on maintaining a 62.5% gross margin (40-15=25/40=.625). And if a variance occurs between standard costs and actual costs, then likely there are one of two things happening: efficiencies or inefficiencies.
If you’re on the production side of the equation, it’s all about efficiency…being on the positive side of the variance teeter-totter. This is where you impact the bottom line! Actual costs > standard costs = negative variance, actual costs < standard costs = positive variance. It’s about making the best quality product for the lowest price while maintaining a margin that supports your business model and growth plans. Simple concept right?
It’s all about results/making your business better:
The amount of work we’ve been doing with our customers to bring focus to this concept has been significant.
Said one executive, “…there is only so much you can do on the other side of the equation in terms of price hikes, so as we look at how we're going to increase value for our shareholders, we need to dig deeper than ever on the production cost side and additional focus on standard cost is reaping us rewards.” Not only have we seen extreme focus on standard cost/variance management, the ability to squeeze more exists even when you think you can squeeze no more.
What are you doing to notch-up the focus on variance management?