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Accounting Best Practices, Fifth Edition by Steven M. Bragg Englewood, Colorado

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9–5. Use Perfect Standards for Material Variance Reporting

The typical bill of materials contains a standard amount of scrap that is expected to occur as part of the manufacturing process. Once a reporting period is completed, the cost accountant summarizes the standard amount of expected scrap listed in the bills of material, and constructs variances by comparing the standard scrap to actual scrap. The problem with this approach is that the company adopts a mind-set that the standard scrap levels are acceptable, and so never undertakes any scrap reduction activities that will shrink the amount of “standard” scrap.

To avoid this mind-set trap, assume a zero level of baseline scrap for variance reporting purposes. Also, rather than reporting a materials variance, instead report on the total amount of wasted materials (since there is no longer a baseline from which to calculate a variance). By making these changes, management can now see the total amount of scrap and presumably take action to reduce it to levels well below their former levels.

The cost accountant’s variance reporting is now replaced with a detailed examination of the dollar value of various types of scrap, which helps management direct its efforts into the reduction of those sources of waste having the greatest dollar value. Thus, the cost accountant is constantly reshuffling the waste data to ascertain where the next waste reduction campaign can be most profitably initiated, which will likely include the use of ...

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