Cost modeling answers the question "how much should it cost?", while cost accounting answers the question "how much did it cost?" . The difference between the two is the most instructive outcome of production management.
Scope
Cost accumulator: Defines which object the cost accumulates on: work order, product, period, project, or process. This varies depending on the production model.
The process of determining actual costs: Recording material receipts, production statements, subcontracting invoices, and overhead allocations in the cost aggregate.
Overhead allocation: The transfer of expenses collected in cost centers to production using activity ratios or activity-based keys.
Work-in-process valuation: The valuation of incomplete work orders at the end of the period, based on their degree of completion.
Order closing and difference adjustment: The financial closing of the order, and the transfer of any deviations from the standard to the relevant accounts.
Period closing: The sequential and controlled execution of monthly cost closing steps.
Revaluation at actual cost: At the end of the period, reflecting actual costs in the cost of inventory and goods sold.
Deviation analysis
The total amount of the deviation is not information; it becomes information when it is broken down into its causal components .
Type of deviation
What does it show?
Whose responsibility is this?
Material price variance
Raw materials are purchased at a price different from the standard.
Purchasing; market conditions
Material quantity deviation
Consuming more or less than what is prescribed.
Production; recipe accuracy, waste
Labor wage discrimination
The hourly rate differs from the standard.
Human resources; wage policy.
Labor productivity variance
The work takes longer or shorter than standard.
Production; methods, expertise, equipment.
Installation deviation
Preparation time differs from the standard.
Planning; sequencing and batch size.
Capacity deviation
Failure to utilize planned capacity.
Planning and sales; insufficient volume.
Fire and scrap deviation
More losses than expected.
Production and quality; process stability.
Yield variance
Deviation of process output from recipe yield
Production and engineering; process parameters
Mixed and substitution bias
The impact of using alternative raw materials
Planning and purchasing
Correct interpretation of the deviation
Deviation doesn't automatically mean "bad." For example, a positive deviation in material quantity could indicate increased productivity, but it could also indicate that the recipe doesn't reflect reality . A consistent deviation in the same direction is a standards issue , not a performance issue.
The practical rule is this: randomly fluctuating deviations indicate process variability, while systematic and unidirectional deviations point to a flawed standard. When the latter is detected, it is the underlying data, not the field, that needs correction.
Benefit to the customer
The actual cost per product is known; pricing is not based on estimates.
Products and customers that are losing money are identified.
The financial cost of the improvement becomes measurable.
The closing of the period is accelerated, and financial statements are produced earlier.
Standard costs become closer to reality over time.
The closing loop: The output of cost accounting is not a report, but feedback . Variance analysis corrects the bill of materials and route times; the corrected master data improves the plan for the next period; the improved plan reduces losses in the field. When this cycle is complete, production management becomes a self-correcting system.