Two key concepts in manufacturing accounting can also cause big headaches. We’re talking about standard cost vs actual cost. If you’re a business owner or manager trying to wrap your head around the numbers, talking to your accountant can lead to more questions.
In this article, we’ll break down the differences between standard cost and actual cost, the pros and cons of using one or the other, and help provide some meaning about your business’s performance and efficiency using data.
What’s the Difference Between Standard Cost vs Actual Cost in Manufacturing?
The main difference between standard cost and actual cost is that standard cost represents the expected cost of production, whereas actual cost represents what your company really paid. The difference between standing and actual costing is called a manufacturing variance. But let’s get deeper into the definitions first.
Standard Cost: Key Features
Standard cost is a tricky beast. It is the predetermined or expected cost of manufacturing a product. You want to ensure you have realistic expenses in mind before you set out to manufacture a product, but you can’t predict the future.
Furthermore, determining standard costs typically involves collaboration among various departments, including accounting, production, purchasing, and engineering.
And, standard cost is calculated based on numerous factors, like material costs, labor costs, overhead costs, historical data, industry benchmarks, and engineering standards.
That’s a lot of input to land on a single number.
Actual Cost: Key Features
Actual cost is easier to calculate because your business has already spent the money to produce the product. Actual cost refers to the real costs incurred during the production process via the consumption of materials, labor hours worked, and overhead expenses.
Standard Cost vs Actual Cost Variance Analysis
Manufacturing variances occur when there is a difference between the expected cost, aka the standard cost, and the actual cost. Manufacturing variances happen. In fact, they are hard to avoid. But analyzing the variance can provide insights into your business’s performance and efficiency.
Favorable Variances
A favorable manufacturing variance happens when the actual cost is lower than the standard cost. Maybe procurement was about to find the same materials from a less expensive supplier, or perhaps you implemented new technology that reduced labor hours. A favorable variance indicates some sort of efficiency improvement or cost savings.
Unfavorable Variances
An unfavorable variance means that somewhere along the line, money was overspent. In other words, the actual cost exceeded the standard cost. Unfavorable variances could be the result of a supply chain disruption that increased the price of materials, machine breakdowns, an unreliable workforce, or more.
By analyzing these variances, you can pinpoint problems, identify areas for improvement, make adjustments to the production process, and better manage costs and profitability.
How ERP Software Streamlines Standard Cost vs Actual Cost Capture and Analysis
Your accounting team likely already has a method for calculating standard cost vs actual cost, but how accurate is it? First of all, accountants tend to prefer adding actual cost to their general ledger to keep the books clean. But the fact is that only leaning on standard or actual cost won’t tell the whole story.
In our 35+ years of experience, we’ve found that enterprise resource planning (ERP) software significantly streamlines and improves the process – from data collection to bookkeeping to analysis. Here’s how:
1. Standard Cost Management
ERP systems like Infor SyteLine include modules specifically designed to management standard cost. These accounting modules allow your financial team to set standard costs for materials, labor, and overhead, which can be easily updated for changes in market conditions, production processes, and company growth.
Moreover, ERP systems act as a centralized database for all departments, meaning that all departments will be working off the same data. This increases collaboration and keeps everyone on the same page.
2. Integrate Your Accounting System
Don’t worry – your accountants can keep using the software of their choice. ERP software is designed to integrate with third-party software, so you don’t have to overhaul all your current systems. Integrating your current accounting system with your ERP system simply makes tracking and reporting of stand cost variances a breeze.
Your team can compare actual costs against standard costs in real-time for more informed decision-making.
3. Automatically Capture Data
One of the biggest benefits of ERP software is its ability to automate routine tasks, one of which is capturing data related to actual costs, like material consumption, labor hours, machine utilization, and overhead. Automated data capture reduces the risk of human error, ensuring accuracy and making sure all stakeholders are working with the same numbers.
4. Analyze Manufacturing Variances Quickly
ERP systems come with tools and templates for variance analysis and reporting. Advanced data analysis tools allow you to drill down on a granular level and uncover exactly where the biggest improvements can be made in the manufacturing process. Your team can work with customizable dashboards and reports to easily visualize cost variances and trends.
5. Advanced Forecasting
Continuously improve by leveraging advanced forecasting and predictive analytics tools and modules. Advanced forecasting uses historical data and market trends to project future standard costs and anticipate potential cost-saving opportunities.
Launch Your Accounting Team Into the Future
If you want to better understand your manufacturing variances and learn how to improve your manufacturing business as a whole, ask the experts at Godlan. We can help you optimize your systems to maximize performance and increase profitability. Contact us today to learn more.
