A medium-sized company monthly analyses the variances between the actual and standard costs. The variances are consistently significant and remain difficult to explain. The management identified that the variances are mainly caused by how labor time is registered by production employees. Some hours are not registered, while other hours are recorded several times. This results in an incorrect calculation of standard labor time and standard costs.
The company liked to have the labor time registration process analyzed and improved.
The first objective was to ensure that the production employees register their labor time in a correct and uniform manner. This was achieved through trainings, new templates,… The proper functioning of the new work method was guaranteed by multiple preceding tests.
A few months later, the standard costs – based on the now correct and uniform labor time registrations – were again calculated and analyzed. As a result of the correct labor time registration and an update of the standard costs, the variances between actual and standard costs were reduced. Furthermore, the variances could better be explained.
Thanks to the improved process, the medium-sized company can now better analyze the variances and adequately fine-tune if necessary.