Standard cost implementation

Implementation of Standard Cost to secure the right operational behaviour and transparency in reporting.

Challenge

The client had identified two key issues with the existing cost principles:

1. The cost principles did not ensure proper operational behaviour.
2. The cost principles did not allow for appropriate and transparent reporting.

It was decided to implement Standard Cost instead of FIFO on all items, and Implement Consulting Group was asked to assist in the preliminary analysis and planning of the subsequent implementation.

Approach

In close collaboration with the client, all the company’s processes – from procurement of raw materials to delivery of finished goods – were reviewed, and the principles for the calculation of Standard Cost across product groups were identified.

The entire management team participated in an extensive collaborative process which included ongoing analysis and quick decisions. This approach yielded an efficient project which established a range of new initiatives and updated the existing processes.

The work of the project team resulted in the development of the following initiatives:

• Implementation of Standard Cost in management reporting.
• Development of new KPIs in production based on Standard Cost.
• Development of new KPIs in the purchasing department based on Standard Cost.
• Development of new KPIs in the sales department based on Standard Cost.

In addition to the above initiatives, the project team also aligned the following process steps to the new costing system:

• Changes in the company’s ongoing accounting processes.
• Changes in the company’s monthly closing process.
• Principles for updating rate of Standard Cost of all SKUs.
• Changes to the consolidation principles.
• Process for monthly controlling and monitoring of variances in relation to purchasing and production.

Impact

After the intensive collaborative process, the client had established the basis for standardised and transparent costing principles across all product categories.

The project ensured:

• Full transparency of costs across customer and product mix, effectively creating a critical foundation for management reporting and improved decision-making.
• A foundation for more precise follow-up on variances, controlling and reporting on commodity procurement and purchasing processes.

A comprehensive and detailed plan for full implementation of all sub-deliverables towards the new financial year was completed, including resource allocation, time perspectives as well as important milestones.