UPSIDE Consulting defines, harmonizes, and implements a Standard Prod. Cost calculation methodology

UPSIDE Consulting was asked to define and harmonize the Standard Production Cost calculation of an industrial group.

The customer is running several production facilities on different continents, but due to its historic inorganic growth, each location was following its own way of calculating the Standard Production Cost. These cost were used as the basis for the calculation of the intercompany transfer prices which led to inconsistencies.

Problem: Due to the historic circumstances, each location was applying a different method of calculating the Standard Production cost. The different ways of calculating Standard Production Cost in one group of companies carried the problem of incomparability and lead to misinterpretations. Additionally, the Standard Production Cost are the basis for the calculation of Intercompany transfer prices. Being the basis different for similar or same products, it leads to inconsistencies within one group of companies which could escalate to auditing and taxation consequences.

Objective: Understand the current Standard Production Cost calculation approach in each location. Define a common method for all production facilities of how to calculate the Standard Production Cost. Implement the new method with the Controlling responsible in all locations and by this harmonize the calculation basis group wide. Compare the newly calculated Standard Production Cost to the current ones and identify the main differences in each location.

Methodology used: Customized Standard Production Cost calculation. Project Management in close collaboration with the local Controlling teams.

Approach: As an initial step UPSIDE Consulting requested from all locations their current approach to the calculation of the Standard Production Cost. During the follow up calls any open points were clarified. From this exercise it was obvious that there was no common method for the group and the approaches as well as levels of details were very heterogenous.

Based on this information a common denominator was defined as a minimum requirement which each factory shall follow. This common requirement contained the calculation structure to follow, the mapping of certain cost and the allocation keys to be applied on product family level. Any additional level of detail was accepted, but the minimum requirement has to be complied with. This approach was agreed on the group as well as local level.

The implementation was done by the UPSIDE Consulting consultants together with the local Controllers. Initially the new method was explained to the local teams and any questions were answered. The execution was supported by a common calculation tool, developed by UPSIDE Consulting, which needed to be filled by the local teams. Any further doubt was clarified, so that finally the tool provided the new Standard Production Cost following the new, common, group wide methodology.

To this tool the historical Standard Production Cost of each product as well as the Intercompany transfer price calculation was added, in order to show which changes this new approach is generating.

Any major discrepancy of importance was discussed between UPSIDE Consulting with the group and local responsibles and a solution was agreed.

Deliverable:

• Standard Production Cost calculation method applicable to the customers production process in all production facilities compared to the current local Standard Production Cost calculation
• Gap analysis of the new vs. the historic form of calculating the Standard Production Cost
• Proposal for the Intercompany transfer prices based on common rules applied
• Support during the implementation and first year calculation of the Standard Production Cost to the local Controllers.

The customer was very satisfied with the outcome of this project and requested a follow up project of harmonizing the Standard Production Time measurement, which is one of the most important allocation keys. After harmonizing the Standard Production Cost calculation, this is now the largest factor leading to discrepancies as the Standard Production Times are considered (measured or calculated) differently in each location.