Costing Considerations to Improve Your Business

Posted on: September 19, 2016 | By: David Kwo | QAD Business Process

During 2016, we have noticed an increased focus from our client base in proving its costing functions. Costs are a reflection of the value we place on an item, depending on whether the item is purchased or is built. We need to know how much it will cost to buy the item or if manufactured, we need to know the material and/or steps required to build the item.

Standard Cost Set

A Standard Cost Set is also referred to as the GL cost set, because all General Ledger transactions with regards to inventory use this cost set.  Depending on how accurate this cost set is will determine the size and type of the financial variances you will have to account for.  This cost is usually determined at the beginning of the year and remains constant.  Any changes to this cost is tracked, especially if you have an inventory on hand balance.

Challenge: In this world of ever shrinking margins, it is even more critical to create an accurate Standard Cost to measure your performance.  Sometimes you should challenge the cost and validate it against similar items to improve confidence.

Current Cost Set

The Current Cost Set is used as a reference to compare to the standard cost set.  If it is a purchased item, then this cost will reflect the last purchase price. Usually the difference between this price and the Standard Cost for the same item is Purchase Price Variance. For manufactured items, the difference between this cost and the standard cost could be material variance, labor variance or burden variance which usually reflect a difference between what you expected to happen and what actually happened.

Challenge: Periodically you should validate your Standard Costs against the Current Cost to identify potential problem areas such as Purchase Price Variances or Manufacturing issues, and not only for items with inventory balances.

Simulated Cost Set

A Simulated Cost Set is sometimes referred to as the “What If” cost set.  This cost set usually starts as the Standard or the Current Costs and then changes are made based on assumptions to purchase prices, labor costs, efficiency changes etc.  These costs do not affect the General Ledger.  These Cost Sets (and you can have as many as you want) are usually used as part of the budgeting process to determine the new Standard Cost.

Challenge:  Before moving a Simulated Cost set to Standard, always validate the simulated cost against current on hand inventory quantities, total production quantities from the previous year, Sales Quantities from previous year or budgeted quantities to ensure that you are getting the results you expect.

If you find yourself experiencing any of these costing challenges in your business, contact your Chicago based QAD partners at Logan Consulting to set up a consultation and find your best business solution.

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