Updating standard cost
Every effort should be made to stop using these measures as soon as possible on the lean journey.
The solution is simple – develop and deploy lean performance measurements that focus on such things as improving productivity, quality, flow, delivery, cost and lead time.
A lean company must also work to eliminate these variances from even being created because these numbers are on the income statement and as long as they appear on the income statement, they will impact profits and have to be analyzed.
I’ll address how to eliminate these variances later.
In order for the financial statements to be correct, these variances appear on the income statement and impact profitability.
So this type of performance measure also has a direct impact on reported profits.
There is motivation to try to reduce a product cost to improve profitability.
Lean companies must eliminate the use of standard costing for all business decisions.
A Box Score can be used to evaluate a business opportunity’s impact operational performance, capacity and materials, which will drive the financial analysis.
The weakness of using standard costing in decision making in a lean company is that a standard cost doesn’t reflect the actual costs involved in the decision being make.
Every business decision must stand on its own financial analysis, based on the actual revenues, costs and investments required.
Setting labor and overhead rates to zero immediately eliminates most rate, volume and overhead variances because any number multiplied by zero equals zero.