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Redesigning Cost Systems - Essay Example

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Traditional Standard Cost Systems (SCSs) in manufacturing organizations have been criticized for not including the quality variation and placing to much emphasis on price and efficiency. It has received further criticism concerning use of volume variances to measure capacity and disregarding overproduction and inventory buildup…
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Download file to see previous pages It seems to cause competition and arguments between departments. They argue over who was to blame for unfavorable variances when using traditional systems.
Push through productions is productions that use large amounts of raw material and partially finished products. The materials or products are moved from one process to another. The preferred method, "pull through" production, is replacing this old method. The products are in work cells or similar workstations. An employee in a cell can operate several types of equipment. An order can be processed quickly within the cell. The "pull through" method is preferred because it decreases cycle time and holds on orders. The inventory is not overloaded with this method either. One group is responsible for the product as a whole. This decreases the chance of defects.
The best way to make standard cost systems more dynamic is to update the variances. Variances in raw materials can be updated by adding a quality variance. This will allow the materials that were produced, but not used, to be factored into the equation. The efficiency variance factors the difference between the weight of the material used and the standard weight used for total production. The traditional method uses the weight of good production instead of total production. Another way to add variances is to split up the volume variance into market size and market share variances. A good way to deal with orders that are completed but not shipped is the Finished Goods Variance. If a sales order could not be filled for any reason, it results in loss of opportunity. To use this as a factor there is a Sales Order Variance. Other ways to add dynamics to the standard system are to use best performance records for a variance on past performances. This is a highly motivating tool for businesses. Benchmarking tracks the performance of competitors. This is another motivating tool. This competition will also encourage a better product for consumers. Another way to use dynamic standards is through moving cost reductions. This decreases the standard cost by a certain percent each period. Target cost is another method used to make a product viable in today's market. By setting a price before production, manufacturers can find ways to lower the cost until it reaches the target. The reports on SCSs need to be accurate to be viable. A team atmosphere avoids conflict and encourages employees to be responsible. A team using a work cell arrangement and variances on reports will be less likely to be in conflict and in return be more productive. The final way to improve SCSs is to use it in relation to ABC. When a company has many indirect costs, ABC results produce better pricing. If combined, ABC can be used for indirect costs or analysis of indirect costs and SCS can be updated and used for direct costs or financial records.
4. Considering the suggestions made in this article, in contrast to the chapter presentation of standard costing, which ideas make the most sense to you and why
I like the idea of using the SCS in conjunction with ABC. I make sense to track both direct and ...Download file to see next pagesRead More
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