Retail consulting is a Leading to a Modest and Equitable Way of Life

Posted by John Smith on March 1st, 2018

Most manufacturing companies have a standard cost system. Their first motivation for this system is to simplify inventory valuation and tracking. Then with all the resulting information available from this system, it seems only logical to use it for key performance indicators or KPI's. One indicator could be a product's total Distribution Labor Standards cost; others could be variances recorded for material prices, scrap, labor rates, labor efficiency, and overhead. Variances are the differences between a standard and the actual costs or usage. The problem with standards as key performance indicators is that they are interrelated and may trigger unintended consequences.

For a simple, yet classic, example, let's assume that purchasing has a purchase price variance performance indicator and that purchasing is rewarded for a favorable variance. A purchase price variance is the difference between the standard cost and the actual price of materials purchased. However, purchasing also has a role in setting the cost Labor standards for materials. With all else equal, purchasing would drive for higher standards for materials. Then when they negotiate a lower price, the resulting more favorable variance contributes to their performance evaluation.