In conversations with manufacturing companies, it’s not long before the discussion of effective costing processes turns to a chat about profitability. Read the latest article by Andy Bigalow, “The Cost of Poor Costing“, to explore how knowing your true manufacturing costs directly affects a company’s profitability.
Posts Tagged ‘Profitability’
Today I met with finance and operations managers for a manufacturing company that didn’t really understand the unique costs of each product they produce. As a result, they weren’t really sure of the margins being created by each product and customer they serve. The interesting part was that these very same managers were pondering whether they could afford to invest in a costing system. As I listened I couldn’t help but wonder, “How can you NOT afford to invest in a costing system? Doesn’t everyone know that a true and accurate understanding of your product costs is paramount to the success of a competitive, commodity business? “
As the meeting continued, topics like capacity utilization, fixed cost absorption, and the need to produce forecasted costs based on future period sales forecasts and radically changing raw material prices came up. The voice inside my head yelled, “How can you NOT afford to invest in a costing system?” Admittedly and shamefully adopted from the political arena, I too often find my inner cost accountant shouting IT’S THE COST STUPID!, and right then I knew the name of my blog.
At the heart of any successful commodity-goods manufacturer is a cost-focused culture that understands and embraces this mantra. In these challenging economic times – arguably more so than in better times – a full understanding of the true and accurate costs incurred at the unique product level are of utmost importance. In fact, this data truly creates a competitive advantage in the market place. True and accurate costing data that allows me to decide where best to produce my products, which of my production lines to set idle, which orders and price points to accept and which to reject, gives me an advantage over a producer that doesn’t share the same level of cost insight. Without this insight my seemingly correct answers to these questions could lead me in the exact wrong direction. A seasoned cost accountant once told me, “There is much truth in detailed, accurate cost data”. Perhaps it is this truth that many business leaders are afraid to face!
As I wrapped up today’s meeting and we parted company, my gracious hosts shared with me proudly their plans for an upcoming ERP upgrade project that was scheduled to take two years to complete. We wondered together whether they should work towards understanding their product costs now or wait until after the ERP project. Arghhhh…. Say it with me… IT’S THE COST!
3C Software recently posted an article on their website discussing the challenges process manufacturers face with calculating profitability. It starts with the premise that calculating costs is the most unpredictable part of the traditional profit calculation:
“One of the first lessons of accounting is the equation Profit = Revenue – Cost. Since aggressive revenue growth is not in the cards for many manufacturers, they are refocused on managing costs as the best option to improve profitability. For process manufacturers, applying that equation to determine profitable products or customers is not as simple as it seems.”
Is calculating costs the most challenging part of the profitability equation? How does your company handle costing?