Cost control in manufacturing is like a marathon, running fast (high efficiency) and steady (no overspending). But the question is: how do we know if the money actually spent is more or less? How quickly do we find out where the problem is? At this point, the “standard cost method” is a ruler of volume costs, while the “discrepancies analysis” finds a direction for improvement through differences in the size of the ruler。
I. What is the standard cost method? - set a standard for “reasonable spending”
Standard costs, in short, are the “reasonable cost targets” that the enterprise sets for each product in advance. For example, an electric fan is produced, and the enterprise calculates in advance on the basis of historical data, industry level and process requirements:
Why standard costs
Discovery of problems faster than actual costs: without waiting until the end of the month to close, waste of materials and inefficiencies can be detected in the production process against standards. Simplified accounting: no recosting of each shipment is required, and standard cost pricing and profit analysis are used directly. Performance appraisal: a clear cost target for the productive sector has been done well. Analysis of variances: dismantling “where is the money going?”
After actual production, the finance compares the actual costs with standard costs, the difference being the cost difference. But knowing that “overspends” are useless, we have to open up and see what's wrong。
1. Material cost difference: is it expensive or is it much more expensive? Material usage difference = (actual - standard) x standard unit price 2. Difference in labour costs: slow workers or wage increases? Manpower efficiency difference = (actual - standard working hours) x standard hourly wage 3. Manufacturing cost difference: equipment broken? Or isn't there enough energy? — from numbers to action
Case: actual cost of an electric fan for a month of $150 per station, standard cost of $130, total difference of $20 per station。
Corrective measures: procurement department to find alternative suppliers or enter into long-term price agreements; production department to train workers to regulate operations and reduce waste; engineering department to optimize assembly processes and reduce working hours。
Key principles:
Iv. Common error zones and detoxification methods
Mistake 1: "standard costs are fixed and will never change."
Wrong result: market prices for raw materials are down, but standard costs are still at old prices, masking weak procurement negotiations。
Decomposition: a quarterly or semi-annual review of standard costs adjusted to market and technology changes。
Mistake 2: “the variance analysis is the financial stabbing”
Wrong result: ministry of production contradicts the view that the finance is not business-friendly and data cannot be landed。
Decomposition: participation of production and procurement in standard cost setting, with differences analysis discussing solutions。
Misdirection 3: “contribution only to adverse differences and neglect of favourable differences”
Case: material usage was 5 per cent less than the standard for three months in a row and could be reduced by theft。
Decomposition: significant positive differences are also analysed to avoid quality risks。
Summary: the standard cost method is not “fall-after-fall” but “process navigation”
The core value of the standard cost method is not “how much has been overspent” to the owner ex post facto, but to expose problems in production, procurement and management in real time through a variance analysis. For example:
Ultimately, this “cost rule” helps enterprises move from rough management to precision control so that every penny is clearly visible。
