Zelda, a line manager at a small manufacturing company, has used a standard costing (SC) model for a decade. At the start of its implementation, her company’s product life cycles typically ranged from three to five years and direct labor costs comprised between 50% and 60% of total product costs.
However, industry and overall business trends have changed significantly since Zelda implemented the SC model. As the company finds itself lowering its labor costs and introducing new products to market almost every year, Zelda believes she should investigate the benefit of continuing use of SC.
The market changes mean competitors introduce new products much more quickly. To remain competitive, Zelda’s company must create standards, investigate cost variances, and take remedial actions as they bring their own products to market. In addition, the company can no longer settle for controlling costs by comparing actual results to internally developed standards. Zelda and her company’s management team believe that they must price their products and services correctly from the start, produce them at a cost that generates a profit, and include the value and features that customers demand.
The company’s traditional SC system can still help them control costs and identify inefficiencies after production occurs. But they must also look to the marketplace for the price customers will pay and determine the required profit to identify their target cost before going to market. Zelda accepts that they may need to fundamentally redesign a product or service and institute major cost reduction and continuous improvement initiatives to reach the target cost.
Zelda believes she can modify the current SC system by first understanding the relationship between SC, flexible budgets, and variance analysis, as well as the problems associated with examining cost variances. She can then determine how SC accommodates target costing and value engineering to facilitate her company’s goals.
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