Practice standard cost leads to increase the quantities produced and therefore stocks to reduce unit costs by product, which goes against the lean principles.
A lean enterprise requires a system cost:
- Focuses on the die (where value is created)
- It is simple and easy to use
- Provides measures of performance for the sector
- Eliminates accounting transactions and the allocation of overhead costs.
Production costs by sector
Production costs in the sector take into account all costs of the supply chain (materials, purchasing, personnel costs, equipment, m², depreciation …) for the design activity to billing activity. These are considered direct costs. External costs to the industry are not taken into account.
To calculate the cost of a product is simply the average cost of production of the sector since the products produced are homogeneous within a sector. To calculate this average cost by dividing the cost of production of the sector by the number of units sold. Dividing production costs by the number of units sold and not produced should encourage them to reduce inventory and increase the number of units sold.
The elimination of allocations of overhead costs does not complicate the reporting with data that managers do not possess directly.
Characteristics of product cost
Although it is more interesting to know the cost of production by sector that by product, there are situations where it is necessary to know the cost of production of a product (transfer prices, customs document). In this case, we analyze how a product moves away from the norm, and therefore how it differs significantly from the average.
We define the product characteristics that create costs (number of components to be mounted, number of machining points …) and how much they add to the product cost compared to the average cost. The first inductor of cost in the industry is the flow of the product as a product with 10 units per hour has double the cost of processing of a product to 20 units per hour.
This system of production cost by sector requires a specific routing of the costs of materials and labor used per sector and is useful for eliminating traceability through production order and manufacturing stage.