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SHAW FINANCIAL LITERACYBreakout Session

Standard Cost, POVA, Manufacturing Cost, PPV & OPV

March 24, 2015

Becky Boley – Corporate Manufacturing AccountingJason Cookston – Corporate Manufacturing Accounting

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Agenda

• Standard Cost• POVA• Manufacturing Costs• OPV• PPV

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Standard Cost

What is Standard Cost?

Standard is a benchmark or norm for measuring performance. A standard cost system is an accounting system with 2 main objectives:

1. Value products produced by a manufacturing process.

2. Measure manufacturing’s performance.

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Standard Cost

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Standard Cost

Why use a Standard Cost System?

1. If you look at 2 different styles of carpet it seems logical that it cost more to make one style than it does the other. Without a standard cost system, it would be difficult to know how much cost to assign to each product.

2. How does management measure a plant’s performance? If you don’t know how much it should cost to manufacture carpet then how can you know if the actual cost was high, low or just right?

3. Using a standard cost allows us to determine an estimate of what the cost should be for a plant for a given period of time.

4. At month end, we compare what the costs should have been to what the costs actually were.

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POVA

What does POVA stand for?

Plant Operating Variance Analysis

What is the POVA?

The POVA is a set of financial reports from all manufacturing facilities showing an individual plants weekly and monthly financial performance. It compares actual to standard and generates the plants total variance.

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POVA

• The POVA has major sections of actual, budget, standard and variance.

• It is a made up of accounts 500320 – Supplies and departments 01355 – Yarn Cabling.

• Every account falls into a category. ( Raw Materials, Labor, Utilities, Controllable Variable, Fixed, Depreciation)

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Example Summary Pova Report

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Example Plant

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Example Detail Pova Report

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Example Plant

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Pova

• Weekly POVA’s are the plants best assumption of what the weekly spend will be and accumulated to a monthly total.

• Monthly POVA’s are populated from our general ledger system Peoplesoft and give an accurate picture to what expenses truly are.

• Plant results are reviewed and differences are explained between their weekly Pova and Monthly Pova.

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Manufacturing Cost

What are Manufacturing Costs?

The costs necessary to convert raw materials into products. All manufacturing costs are absorbed into the inventory and used in the calculation of Cost of Goods Sold (COGS).

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Manufacturing Costs

Manufacturing Costs are typically divided into three categories:

1. Direct Materials – the cost of the materials which become part of the finished product. For example, the cost of lumber for hardwood.

2. Direct Labor – the cost of the wages of the individuals who are physically involved in converting raw materials into a finished product. For example, the person hand scraping the hardwood.

3. Manufacturing Overhead – all other manufacturing costs incurred that are not directly traceable to the finished product. For example, the wages of the person who inspects the hardwood. Another example is depreciation.

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PPV

Purchase Price Variance or PPV is the difference between the actual price paid for an item and the standard price(cost).

The actual price comes straight from the vendor invoice. The standard is what we expect it to cost.

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PPV

Example:

In February, we purchased 1,000 pounds of resin. Our standard price(cost) for resin is $5.00 per pound. Actual invoice price for February is $5.25.

The formula is (Actual Price-Standard price) x Actual Quantity.

($5.25-$5.00) x 1,000 pounds = $250 unfavorable PPV. We paid $250 more than what we expected to pay.

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PPV

A positive variance means that actual costs have increased which is an unfavorable variance. A negative variance means that actual costs have decreased and is a favorable variance.

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OPV

Operating Variance or OPV - is the difference between the actual cost of manufacturing versus the standard cost. The occurrence of variances is very normal and should be used as tools to improve efficiencies and control costs.

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Questions? / Discussion

Thanks for coming

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