Early in my career I worked at a small manufacturing company that produced pressure washers. We were the American subsidiary of a large German manufacturer. We produced a limited number of small electric machines that was very suitable for standard costing. Since my predecessor, who had setup the system was loaned from the parent company, he had setup GPK as the overhead application methodology.

For those unfamiliar with GPK, it uses cost pools to apply overhead. We actually had a limited number, I recall about seven, including engineering. The different cost pools all have their own cost drivers, which help apply the overhead more accurately to products than the peanut butter approach most companies use, as opposed to ABC for example. Of course our ERP system was made by Siemens and the program itself was written in German Basic, which limited our abilities somewhat (since only the few ex-pats spoke German). Our BOM’s and Routes were fairly simple and easy to understand and update. My only other real responsibility was to lead the physical inventory each year.

As a supplier to Lowe’s, they would allow returns for any reason, which we were required to take back. Each time we accumulated a good sized batch of a particular model, the rework assembly line would tear them apart and rebuild them. We had a regular BOM for each model of machine, the parts and labor used were recorded on a form. I would cost out the average cost per machine. The machines were sold to a retailer who specialized in rebuilt merchandise, I think it was MacFrugal’s. Obviously we wanted to know the profitability of these returned machines. In hindsight, I think we would have been better off treating the rework line as process costing rather than a variation of standard cost. Of course at the time, I was too inexperienced to know this.

An example of standard cost in action, GPK to apply overhead, and process cost for the repair line. Standard cost may have been getting a really bum rap, costing systems are quite often setup by Financial Accountants who do not understand cost (sorry, but it is true). Most standard cost systems still today are not setup or maintained well. This is the reason beyond the Society of Cost Management is putting together an updated Guide for Using Standard Cost. If you would like to contribute or help by editing, please let us know at info@costmgmt.org.

 

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