How can you implement a standard cost system?

1 Set your objectives

Before you start, you need to define your objectives and expectations for using a standard cost system. What are the benefits and drawbacks of this method for your business? How will it affect your accounting, reporting, and budgeting processes? How will you communicate and train your staff and stakeholders on the new system? How will you monitor and evaluate the results? Having clear and realistic objectives will help you align your actions and resources with your desired outcomes.

2 Determine your cost standards

The next step is to determine your cost standards for each product or service you offer. Cost standards are the expected or budgeted costs of the inputs and outputs involved in your production or operation. They can be divided into direct materials, direct labor, and overhead costs. You can use various methods to calculate your cost standards, such as historical data, market prices, engineering estimates, or industry benchmarks. You should also consider factors such as inflation, quality, efficiency, and waste when setting your cost standards.

3 Establish your cost accounting system

Once you have your cost standards, you need to establish your cost accounting system to record and track your actual costs and compare them with your standard costs. You can use different cost accounting methods, such as job order costing, process costing, or activity-based costing, depending on the nature and complexity of your production or operation. You should also choose an appropriate inventory valuation method, such as FIFO, LIFO, or weighted average, to account for changes in inventory costs over time.

4 Analyze and report your variances

The next step is to analyze and report your variances, which are the differences between your actual costs and your standard costs. Variances can be favorable or unfavorable, depending on whether they increase or decrease your profit. You can use various variance analysis techniques, such as material variance, labor variance, or overhead variance, to identify the sources and causes of your variances. You should also prepare and present regular variance reports to your management and stakeholders, highlighting the key findings and recommendations.

5 Review and update your cost standards

The final step is to review and update your cost standards periodically to ensure that they reflect the current market conditions and operational realities. You should also evaluate the effectiveness and efficiency of your standard cost system and make adjustments as needed. You can use various performance indicators, such as standard cost variance, inventory turnover, or gross margin, to measure and improve your inventory performance. You should also solicit feedback from your staff and stakeholders and incorporate their suggestions and best practices.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?