Standard Cost in a Commodity Based Industry

mrmccull

Member
Southern States Cooperative uses the J D Edwards World A7.3 Manufacturing System and Standard Costing to support our manufacturing operations. We manufacture Animal Feeds (12 manufacturing locations) and Crop Fertilizers (8 manufacturing locations). We sell at both the wholesale and retail levels. Both these products are manufactured from commodity raw materials that are subject to major price swings on a daily and even hourly basis. Sales are highly seasonal and subject to major variation based on weather conditions. Typical lead time from receipt of order to delivery of product is three days or less. The majority of product is "make to order". This combination of business conditions makes it extremely difficult to achieve an accurate sales/manufacturing forecast and accurate standard costs.

Due to the nature of the business, most major non-raw material costs such as labor are "fixed" for periods of several months, thus the "actual" per unit cost rate varies widely depending on manufacturing volume. We end up every month with substantial over or under absorption of manufacturing costs which creates a "surprise" for the Operations VP's on their final monthly P&L. The only solution we have been able to come up with is to change the standard costs frequently (weekly or monthly). That solution seems impractical to us.
We have about 14,000 SKUs across branch plants.

We are looking to make contact with others who may operate in a similar environment and have been able to successfully utilize the J D Edwards Manufacturing System and Standard Costs. Any comments or suggestions would be appreciated
 
Our environment is not as volatile as yours, but we do have some of the same issues. I'm not sure I understand the issue completely, so please forgive if I'm off base.
Regarding swings in the purchase cost of raw ingredients and packaging materials, we reached a compromise where we change the standards quarterly. In the interim, we have the AAI's configured so that the purchase price variance, which is the difference between what we forecast the costs to be and what we actually end up paying, is charged to the Supply Chain folks rather than the Manufacturing departments. These are the people whose responsibility it is to negotiate relatively stable and competitive supply arrangements for the manufacturing inputs, and they wear the variances where they haven't been as successful in keeping costs down or forecasting them accurately.
As for absorption variances due to volume, these shouldn't be any sort of a surprise to the operations people, because they ought to know what their utilization rates are for the plants, and they should be taking steps to mitigate the effects of the volume swings by trying to convert more of the costs to variable (negotiating better labour contracts, for example), changing the scheduling methodology, and so on.
I think if you can separate out the two types of variance and put the responsibility where it lies, the system works pretty well.
 
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