“Doomsdayers” have been predicting the end of the world since the beginning of time. The last time I recall was when the Mayan calendar ended sometime in December 2012. Nothing happened! And last time I checked, we are all still here.
People passionate about standard costing often talk the same way, believing that somehow a company using standard costing would go haywire or simply implode if standard costing went away.
But, there’s another side of the story.
Recently I’ve been working at a company in Oklahoma that has made a commitment to Lean Accounting. They are in the process of getting Lean Accounting set up, and they recently made one bold move.
On May 1, 2014, they went into their ERP system and set labor and overhead rates to zero. They effectively turned off standard costing for labor and overhead, while at this point material is still kept at standard. Lo and behold, the company is still there – I can confirm this because I was there last week. The building didn’t vaporize, nor did the employees turn into zombies.
This month, they are going to capitalize manufacturing costs onto the balance sheet with a simple journal entry, which eliminates a few days from their month-end close. The people who do customer quotes are happy; they like not having to figure out the labor time of each order. Instead they use a hurdle rate to determine if an order meets minimum profitability requirements. They believe this will allow them to accept orders which in the past would have been deemed unprofitable because standard margin was too low.
Turning off standard cost is possible in any company, no matter how large or how small it is. It is just a matter of the vision and willpower of the leadership in the company.
For a long time, standard costing was the only game in town. We know it’s been used historically in manufacturing companies to keep track and analyze operating performance, profitability analysis and inventory valuation.
We now know Lean Accounting offers a better way to do all of this. Read the details in my recent blog series “Debunking Standard Cost.”