Standard costing provides valuable information that is used for the management and control of materials, labor, and other activities related to production.
Both large and small firms are increasingly using computerized standard costing systems. For example, companies such as Sandoz (a maker of generic drugs) and Dell store standard prices and standard quantities in their computer systems. A bar code scanner records the receipt of materials, immediately costing each material using its stored standard price. The receipt of materials is then matched with the firm’s purchase orders and recorded in accounts payable to isolate the direct material price variance.
The direct materials efficiency variance is calculated as output is completed by comparing the standard quantity of direct materials that should have been used with the computerized request for direct materials submitted by an operator on the production floor. Labor variances are calculated as employees log into production-floor terminals and punch in their employee numbers, start and end times, and the quantity of product they helped produce. Enterprise resource planning (ERP) systems (see Chapter 6) have made it easy for firms to track standard, average, and actual costs and assess variances in real time. Managers use this instantaneous feedback to immediately detect and correct cost-related problems.
Manufacturing firms as well as firms in the service sector find standard costing to be a useful tool. Companies implementing total quality management programs use standard costing to control materials costs. Service-sector companies such as McDonald’s use standard costs to control labor costs. Companies implementing computer-integrated manufacturing (CIM), such as Toyota, use flexible budgeting and standard costing to manage activities such as materials handling and setups. Variance information helps managers identify areas of the firm’s manufacturing or purchasing process that most need attention.