FI NANCI AL MANAGEMENT

Standardcosting
Insightsfromleadingcompanies
February2010
ADVI SORY

ExecutiveSummary
Thecurrenteconomiccrisishascreatedsignicantcost
pressuresonbusinesses.Thiscoupledwithforeignexchange,
rawmaterialandcommoditypricevolatilityhasincreased
thefocusontheappropriateness,applicationanduseof
standardcosts.
Historicallymanycompanieshave
tendedtocalculatestandardcosts
annuallybasedonunderlyingcosts
atthetimeofbudgetpreparation.
Intimesofeconomicstabilitythese
standardcostshaveprovidedagood
measureagainstwhichtomanage
thebusinessthroughthefollowing
nancialyear.However,recentvolatility
hasoftenresultedinsignicant
managementtimebeinginvestedin
understandingvariancesagainst
standardcostthataredrivenlargely
bynon-controllablemacro-economic
factorsratherthanthemoreusefuland
value-addactivitiesofunderstanding
andaddressingmanufacturing
efciencyandeffectiveness.
Inthelightofthecurrentclimate
KPMGintheUKhasundertakensome
globalresearchdesignedtohighlight
thecurrenttrendsandissuesaround
standardcosting.Thisdocumentsets
outasummaryofthekeyndingsof
thatresearch.
Allcompaniessurveyedusestandard
costsandvariancestovalue
inventoryforstatutorypurposes,for
managementreportingpurposesand
forperformancemeasurementand
management. Despiteitsprevalence
norespondentsarendingiteasyto
obtaintheinformationandinsight
requiredtosatisfyallthreeof
theseareas.
Keyinsightsandthemesfromthe
surveyinclude:
1. Standardcostingissometimes
over-usedasadecisionmakingtool:
Wherestandardcostingisusedits
limitationsarenotalwaysfully
understoodwithusersoftentreating
itasascienceratherthananart.
Manycompaniesaremovingaway
fromusingstandardcostingastheir
primarytoolforpricingorglobalsupply
chainsourcingdecisions.
2. Comparabilityofstandardcosts
andvariancescanbecompromised
byinconsistentlocalapplicationof
globalmethodologies:
Manygroupshaveoneglobalapproach
butonlyafewcanclaimglobally
consistentapplication.
3.Thebestgroupsinvestin
governanceandorganisation
structurestomaintaintheright
balancebetweenefciencyand
insight:
Centralisedandfocussedvariance
calculationfreesuplocalresources
tofocusonanalysis,interpretation
andaction.
4.Understandingthekey
componentsofastandardproduct
costisvital:
Attimesusinganextractofthe
standardcostcardmaybemore
appropriatetosupportcertainbusiness
decisions,forexampleusingdirect
costsonlytosupportmarginal
productiondecisions.Thebest
companieshadmorethanonecost
perSKUsohadthefunctionalityto
identifyjustdirectcosts,bestever
standard,assetoptimisedstandard,
localcountrystandardandglobal
standardforeachSKU.
5. Increasedeconomicvolatilityis
leadingtomorefrequentstandard
costupdates:
Ingeneralcompaniesareupdating
standardcostsonanannualbasis
howeverthetrendistowardsallowing
morefrequentupdatesinparticular
wheresignicantunderlyingcost
changeshavebeenseen.
6. Policiesandpracticesaround
absorptionofoverheadsinstandard
costsvary:
Recenttrendstowardscentralisation
ofsupportfunctionshaveoftenled
toinclusionofwhatarenowcentral
overheadsinstandardsdespitethelack
ofcontrolovertheseatafactorylevel.
7. Standardcostscanbeusedas
aspirationalperformancetargetsbut
careshouldbetakentoensurethey
donotbakeininefciency:
Inclusionofwastage,scraporunder
utilisationofassetsinstandardscan
leadtoinefciencyontheshopoor
andhencevalueleakage.
8. Effectiveperformance
managementfocuseson
controllablecosts:
Costingeffort,varianceanalysisand
remediationactivityshouldfocuson
thecontrollableelementsof
performance.
9. Levelsofautomationvarybut
spreadsheetsremainrife:
Norespondentsarendingstandard
costingeasyoreffortless,thisisa
resourceintensiveprocess.Leading
groupsarestrugglingtofullyautomate
standardcostinggloballywithinERPs
andstillrelyinpartonspreadsheets.
2010KPMGLLP,aUKlimitedliabilitypartnership,isasubsidiaryofKPMGEuropeLLPandamemberrmoftheKPMGnetworkofindependentmember
rmsafliatedwithKPMGInternationalCooperative,aSwissentity.Allrightsreserved.

Abouttheresearch
KPMGintheUKconductedbothtelephoneandfacetoface
interviewscovering12largelyFortune500manufacturinggroups
duringsummer/autumn2009acrossthefollowingsectors:
Pharmaceuticals
Consumergoods
Industrials
Weconductedaseriesofinterviewsaimedatunderstandingtheoverall
methodologyincludingthepoliciesandprocessesbywhichanumberofglobal
groupsarecalculatingtheirstandardcostsaswellashowthosegroupsareusing
theirstandardcostinginformationeitherasacontrolorotherwise.
Allgroupsinterviewedhadaglobalsupplychain.
Intervieweescomprisedgroupnancedirectors,groupnancialcontrollers,
divisionalnancedirectors,divisionalnancecontrollers,supplychainnance
directorsandtheirdirectreports,andfactorycontrollers.Theinterviewswere
conductedusingastandardstructuredquestionnaire.
Thisdocumentsummarisesthemainndingsagainsteachofninekey
themesidentied.
Background
Standardcostingwhatdowemean?
CIMA,theUKsCharteredInstituteofManagementAccountants
denesstandardcostingasacontroltechniquethatreports
variancesbycomparingactualcoststopre-setstandardsso
facilitatingactionthroughmanagementbyexception.Itgoes
ontofurthersetoutthatastandardcostisacarefully
predeterminedunitcostwhichispreparedforeachcostunit.
Itcontainsdetailsofthestandardamountandpriceofeach
resourcethatwillbeutilisedinprovidingtheserviceor
manufacturingtheproduct.
Costsincludedwithinstandardscomprisedirectmaterialcosts,directlabourcosts
togetherwithindirectoroverheadcosts.Forthepurposesofthispaperwehave
assumedthefollowingdenitions:
1. Costallocationtheprocessofcollectingtogethercertaintypesofoverhead
costrelatedtoproduction,andplannedtobeincludedwithinstandardcosts,
suchthatitcanthenbeeitherdirectlyattributedtoaproductcostorincluded
withinaproductcostsbymeansofanabsorptiontechnique.
2. Costabsorptiontheprocessofapportioningcostsincludingthoseidentied
abovetoindividualstockkeepingunits(SKUs)orproductsonthebasisof
productionactivity.
2010KPMGLLP,aUKlimitedliabilitypartnership,isasubsidiaryofKPMGEuropeLLPandamemberrmoftheKPMGnetworkofindependentmember
rmsafliatedwithKPMGInternationalCooperative,aSwissentity.Allrightsreserved.
Thereisagrowingrecognitionfromall
intervieweesthatmoresophistication
isrequiredaroundtheircosting
methodology.Leadingcompaniesare
usingextractsofthestandardcostcard
mostrelevanttoaparticularbusiness
decisionorcalculatingmorethanone
standardcostcardtodrivedifferent
behaviours,forexample:
1. Useonlydirectcostsformarginal
productiondecisions
2. Buildanalternativecostcard
basedonanassumptionoffull
assetutilisation
3. Buildanalternativecostcard
basedonbesteverachievedcost
FurtherresearchbyCambridge
University,commissionedbyKPMG,
indicatesthatasmuch50percent
ofmanagementdonottrustthe
informationpresentedtothem.
Thisisdueinlargeparttotheuse
madeoftheinformationaswellasthe
governancemodelsdeployedaround
it. Inmanyorganisationsthereis
inconsistentownershipandapplication
ofdenitionsandstandards.Many
globalcompaniesarendingthat
communicationregardingstandards
ismisinterpreted,whichmakes
like-for-likecomparisondifcult,ifnot
impossible.Furtherchallengesare
thattheinformationisnotproduced
throughatrustedchannelandmuch
manipulationofdataisrequired.
Organisationsthathavesolved
thisproblemareabletosignicantly
reducethecostofinformationdelivery,
speedofproductionandimprovethe
usability(referenceKPMGreport
2009:Does your business intelligence
tell you the whole story?).

CIMAcommentary
ThisresearchbyKPMGintostandard
costingillustratestheimportanceof
ensuringtherightinformationisboth
madeavailableandusedeffectively.
Thisprovisionofthemostrelevant
managementinformationandits
properuseispartofamuchwider
issueofsignicancetobusiness
leadersandmanagement
accountants.
TheWalkerReviewwhichscrutinised
corporategovernanceintheUK
nancialsectorhighlightedtheneed
fornonexecutivedirectorstobe
betterinformedandmoreengaged.
Butnonexecutivedirectorscannever
becloseenoughtothebusinessto
becertainoftheirpreciseinformation
needs,nortoinuencemanagements
decisionmakingatanoperational
level.Thisisbecausegood
governanceatboardlevelisa
necessarybutnotasufcient
conditiontoensuregoodperformance
andriskmanagement.
Itisdifcultforthedecisionmakersin
anyorganisationtomaintainakeen
understandingofitscompetitive
position,driversofvalue,potential
risksorevenitsfundamental
economics;itsrevenuesandcosts.
Managementaccountantshave
avitalroletoplayinlteringthe
nancialandothermanagement
information,includingleading
indicatorsandanalysis,aboutposition,
costs,performance,risksand
opportunitiesthatisprovidedto
decisionmakers. Theycanalsohelpto
implementstrategyandcascade
performanceandriskmanagement
throughoutthebusiness. This
percolatoreffectisessentialto
ensuringnotonlygoodgovernance
butalsothepropermanagementof
therminthelongterminterestsof
shareholdersandotherstakeholders.
Theshortcomingsincosting
informationfoundinthisKPMG
surveyillustratewhythispercolator
effect,withinformationlteredupand
inuencecascadeddown,iscrucial.
Inmyopinionitstimetowakeup
andsmellthecoffee.
Leadingorganisationsarealready
transformingtheirnancefunctionsto
bemoreefcientandprovidebetter
informationtoenableevidencebased
decisionmaking. Theyarealso
developinganddeployingmanagement
accountantswhocaninuence
performanceandriskmanagementin
thelongterminterestsofstakeholders.
Organisationsnottransformingtheir
nancefunctioninthiswaycouldbe
puttingtheircompetitivepositionat
risk.
Charles Tilley
Chief Executive CIMA
Keythemesidentiedthrough
ourresearch
1. Standard costing is sometimes
over-used as a decision making tool:
Leadingcompanieshadveryclearly
denedwherestandardcosting
shouldbeusedastheprimarydecision
supporttool,andindeedwhereit
shouldnotbeused.However,a
numberofparticipantswereless
structuredintheirapproachandhad
notformallydenedwhetherstandard
costingshouldbeusedasanindicator
ormeasureforanyorallofinventory
valuation,performancemanagement,
factoryefciency,productsourcing
(bothshortterm/oneoffandlong
term),oneoffcontractpricingdecisions
andoverallpricingdecisions.
Someofthesurveyparticipants
hadmovedawayfromtheuseof
standardcostingasakeymeasure
ofoperationaleffectivenessandlong
termsourcingdecisionspreferring
insteadtouseotheroperationalor
nancialmeasuresandinternaland
externalbenchmarking.
Severalofthesurveyparticipantshad
investedinenhancingthebusiness-
wideunderstandingofthestrengthsof,
limitationsofandalternativesto
standardcostingthroughtrainingand
communications.
KPMGpointofview:
Standardcostingremainsanimportant
partofanydecisionmakingtoolkitbut
itshouldnotbethewholeanswer.
Companiesthatadoptindustrybest
practiceformallydenewherestandard
costingshouldbeusedasaprimary
measureorindicatorfordecision
making,whereitwouldbeappropriate
tousestandardcostsasasecondary
orsupportingmeasureandwhere
standardcostsshouldnotbeused.
2010KPMGLLP,aUKlimitedliabilitypartnership,isasubsidiaryofKPMGEuropeLLPandamemberrmoftheKPMGnetworkofindependentmember
rmsafliatedwithKPMGInternationalCooperative,aSwissentity.Allrightsreserved.

2. Comparabilityofstandardcosts
andvariancescanbecompromised
byinconsistentlocalapplicationofa
globalmethodology:
Oneofthemostefcientapproaches
callsforoneglobalmethodologyand
onegroup-widestandardcostcard
togetherwithalimitednumberof
focussedextractstosupportspecic
deneddecisions.
Thelevelatwhichparticipantsdene
theirstandardcostmethodologyvaries,
withsomegroupssimplysettingan
overallgroup-widepolicytosay,fully
absorbfactoryoverheads,others
deningspecicallyonalinebyline
basisthecoststobeincludedwithin
standardsandthemethodbywhich
toincludethem.
Anumberofgroupsdenedone
overheadallocationorabsorption
methodhoweverothersleftthe
decisionastothemethodusedtothe
localfactorycontrollersdiscretion.
KPMGpointofview:
Consistentdenitionsarenotenough
inthemselves.Todelivervaluable
informationtheyshouldbeapplied
consistentlyatalocallevel.
Organisationsshouldseektoclearly
denetheitemstobeincludedin
standardcostandtheallocationand
absorptionmethodstobeusedfor
overheadsandthenputinplace
governancestructurestoensure
dataintegrityismaintained.
3.Thebestgroupsinvestin
governanceandorganisation
structurestomaintaintheright
balancebetweenefciency
andinsight:
Oneparticipanthadformedaglobal
costingcounciltosetpolicy,ensure
consistencyandopineonitemsthat
shouldorshouldnotbeincluded
withinstandards.
Oneofthegroupssurveyedhadmoved
thebackofceanalysisactivityrelated
tostandardcostsandvarianceanalysis
intohighervaluesharedservice
centresleavingonlythevalueadding
analysis,interpretationandresponse
activityatthefactory.
KPMGpointofview:
Centralisedgovernanceand
centresofexcellencefocussedon
calculatingvariancescanhelpreduce
inconsistenciesandfreeuplocal
factorybasedstafftounderstandand
addresstheissueshighlightedatthe
factorylevel.
4. Understandingthekey
componentsofastandardproduct
costisvital:
Halfofthepopulationsurveyedhad
denedmorethanonetypeofcostfor
certainSKUsorproducts.Asmall
numberoftheparticipantshaddened
theseadditionalcostsasasliceor
carveoutsfromtheirstandardcost
cards;thesedenedslicesofcostare
usedtosupportmarginalproduction
decisions,measureperformanceand
assistwithlongandshortterm
sourcingdecisions.
KPMGpointofview:
Flexibilityisakeyelementhelping
toensuretherightinformationis
usedtosupporttherightdecisions.
Themosteffectiveorganisations
stratifytheirbusiness,productsor
decisionsanddeterminewhereit
wouldbevaluablefordecisionmaking
purposestohavemorethanonecost
typeperSKU.
5. Increasedeconomicvolatilityis
leadingtomorefrequentstandard
costupdates:
Manygroupsupdatestandardcostson
anannualbasis;increasinglygroupsare
providingtheoptionformorefrequent
updateswhennecessary.
Onlyoneofthesurveyparticipants
updatedstandardcostsmore
frequentlythanannually,inthiscase
quarterly.Onegrouphadchosennotto
updatestandardsfortwoyearsgiven
thetimeandresourcerequirementsof
theupdateprocess.
Inthecurrenteconomicclimateseveral
groupswerendingthatanin-year
updatehadbeenorwasexpectedto
benecessaryreectingcommodity
rawmaterialpricechanges,foreign
exchangemovementsand/orpartial
orfullfactoryclosures.In-yearupdates
couldbedealtwithonagroup-wideor
factoryspecicbasis.
KPMGpointofview:
Standardcostsshouldbeupdatedat
leastannuallyandmorefrequentlyin
timesofeconomicturbulence.
2010KPMGLLP,aUKlimitedliabilitypartnership,isasubsidiaryofKPMGEuropeLLPandamemberrmoftheKPMGnetworkofindependentmember
rmsafliatedwithKPMGInternationalCooperative,aSwissentity.Allrightsreserved.

Inthecurrenteconomicclimate
provisionshouldbemadeforin-year
updates,inparticularwherethereare
signicantcommoditypriceandforeign
exchangemovementsorchangesto
theshapeofthebusiness.Timeboxing
theupdateprocessprovidesameans
oflimitingthedrainonresources
encouragingan80/20approach
focussingactivityonmaterialitems.
6. Policiesandpracticesaround
absorptionofoverheadsinstandard
costsvary.Whatcostsshouldyou
includeinstandardsandhowfully
absorbedshouldyoube?
Anumberofparticipantsallowed
orrequiredtheinclusionofcertain
centraloverheadssuchasshared
servicecentrecosts.Manyspecied
thatonlyfactoryleveloverheadscould
beabsorbedintostandardshoweveron
furtherenquiryexceptionstothisrule
wereoftenfound.
Twoparticipantschosenottoabsorb
overheadsduringtheyearbutinstead
toincludesuchcostsininventory
valuationbywayofayearend
adjustment.
Allgroupschosetoadoptanassetlife
ratherthanproductlifeapproachtothe
inclusionofdepreciationinstandards.
Whilepuredevelopmentcostswere
excludedfromstandardcostbyall
participantsanumberdidincludethe
costsofcertainproductdevelopment
activity.
Therewasnocleartrendinthe
treatmentoffreightcostswhen
calculatingstandardcostfactory
specicbasis.
KPMGpointofview:
Thelevelofabsorptioninstandard
costsisdrivenbyacompanysculture
andbehavioursaroundcost
management.
Someformofallocationandabsorption
ofoverheadattheSKU,productor
factorylevelispreferableintermsof
thedaytodaymanagementofyour
overallinventorylevels.Howeverwe
supporttheexclusionofcertaincosts
indenedsituationsaspartofthe
slicinganddicingofyourstandard
costcard.Thekeyishaveclear
denitionsandconsistentapplication
acrosstheorganisationtodeliver
valuableinformation.Wherecostsare
notfullyabsorbeditisveryimportant
thatnancecommunicatewith
thosemakingdecisionssotheycan
understandwhatthestandardcost
includesandexcludes.
7. Arestandardcostsaspirational
performancetargetsordotheybake
ininefciency?e.g.theinclusionof
wastage,scraporunderutilisation
ofassetsinstandardscanleadto
inefciencyontheshopoorand
hencevalueleakage:
Anumberofparticipantsusetheir
standardcostingtodriveperformance
improvement,choosingtoset
standardsatatargetbestever
achievedorassetoptimisedlevel.
Oneparticipantfoundthatinusing
standardcostsasatargettheywereat
timesdrivingthewrongbehaviourson
theshopoor.Insteadofstrivingfor
continuouscostreduction,oncea
targethadbeenachievedworkers
continuedtoaimtomeetthattarget
ratherthanexceed.
KPMG point of view:
Signicantshareholdervaluecanleak
throughunderutilisedassetsand
oracceptingnormalwastagelevels.
Overperiodsoftimeinsetting
standardsthesecoreassumptions
shouldbechallenged.Whereused
correctlyhavingmorethanonecostper
SKUorusingbesteverstandardcan
drivebehaviourstoimproveefciency.
8. Effectiveperformance
managementfocusesoncontrollable
costs:
Anumberoftheparticipantsmake
bonusorperformanceadjustments
toremovethenon-controllable
elementsincludedwithinstandard
costsandvarianceanalysiswhen
assessingindividual,factoryor
regionalresults.
Adjustmentsareoftenmanualand
madeonanadhocorone-offbasis
makingperformancecomparisons
acrosspeople,productsandsitesless
meaningfulandaddingcomplexityto
theperformancemanagementprocess.
KPMG point of view:
Focusingcostingeffort,variance
analysisandremediationactivityonthe
controllableelementsofperformance
isvital,thisenablesmanagement
focustoshiftvarianceanalysisto
understandingandactingratherthan
calculationandanalysis.
9. Levelsofautomationvarybut
spreadsheetsremainrife:
Whilemanyofthegroupsincluded
intheresearchhadgroup-wideor
regionalERPsystemsveryfew
benettedfromsignicantautomation
ofstandardcostingandvariance
analysis.Themajorityofgroups
continuetorelyonasignicantnumber
ofspreadsheetstosupportthisactivity.
KPMG point of view:
Automationoftheendtoendstandard
costingandvarianceanalysisprocessis
noteasyandthisisusuallyaresource
intensiveprocess.Effective,value
adduseofresourcesandappropriate
governanceandcontrolofoff-system
calculationsisimportantinderiving
valueformoneyfromyourstandard
costingprocess
2010KPMGLLP,aUKlimitedliabilitypartnership,isasubsidiaryofKPMGEuropeLLPandamemberrmoftheKPMGnetworkofindependentmember
rmsafliatedwithKPMGInternationalCooperative,aSwissentity.Allrightsreserved.

KPMGs Business Intelligence framework

KPMG Framework Leading Practice
Business Strategy
Alignment
Align information requirements to strategic objectives
Provide clarity of the role of standard costs in decision making
Governance Dene rigid process with clear guidelines via global
costing council
Develop one standard policy that is applied consistently
across all global divisions
Use shared services and centres of excellence to produce
standard reports and variance analysis
Performance
Management Process &
Reporting
Automate data collection
Concentrate on understanding and corrective action rather
than collection and analysis
Integrated Information
Management
Gain clarity and agreement on data denitions globally
Remove data duplication
Ensure there is dimensional protability matching revenue
with costs
Business Intelligence
Platform
Consolidate tools and ensure application ability is maximised
Exploit software as a service
Infrastructure Standardise

Summary
Standardcostingisanimportant
nancialtoolthatoftenisusedto
determinedimensionalprotability
e.g.theprotbycustomer,byproduct
andbychannel.
Standardcostingneedstobe
consideredinawiderframework
ofbusinessintelligencewhere
companiesareseekingtoimprove
performanceandcompetitiveness.
Ensuringthattherightinformationis
deliveredtotherightpeopleattheright
timeandfocussingonhowstrategies
andoperationsareconnectedcan
improvestrategiccompetitveness.
KPMGrmshavedevelopeda
sixlayeredbusinessintelligence
framework.Ourprofessionalshave
foundthatsomecompanieshave
failedtoapplysufcientresource
andinvestmenttoeachlayerona
sustainablebasis.
Researchhasdemonstratedthatasmuchas50percentofmanagement
donottrusttheinformationpresentedtothem.Addressingtherelevance,
timelinessandconsistencyofyourstandardcostinformationisarststep
onthepathwaytoenhancingyourbusinessintelligence.
Special thanks
Wearegratefultothesurveyparticipantsfortheirvaluabletimeandinsights
wewouldalsoliketothankthefollowingKPMGcontributors:SimonOsmer,
RachelWoodsandJeremyThomas
2010KPMGLLP,aUKlimitedliabilitypartnership,isasubsidiaryofKPMGEuropeLLPandamemberrmoftheKPMGnetworkofindependentmember
rmsafliatedwithKPMGInternationalCooperative,aSwissentity.Allrightsreserved.

kpmg.co.uk
Formoreinformation
pleasecontact:
Simon Osmer
Partner, KPMG in the UK
+44(0)7711473241
simon.osmer@kpmg.co.uk
Herman Heyns
Partner, KPMG in the UK
+44(0)2073114478
herman.heyns@kpmg.co.uk
Jeremy Thomas
Director, KPMG in the UK
+44(0)2073118237
jeremy.thomas@kpmg.co.uk
Rachel Woods
Principal advisor, KPMG in the UK
+44(0)2073114276
rachel.woods@kpmg.co.uk
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