Effective planning combines historical sales performance and anticipated sales levels with manufacturing cost data.

To create the forecast, historical and estimated sales information is normalized and transformed into a more granular, SKU-level view that guides plant loading decisions and builds both summary and detailed budgets.

Adjusting the volume and mix of products manufactured as well as the plant loading percentages can significanty impact overall profits.

Both detailed and summary budget approaches

Multiply standard costs for direct labor, factory overhead and direct materials by the expected volume and mix of the product to create a summary budget that is segmented by General Ledger account. For a more detailed view of the budget, calculate the budget at the BOM and Routing levels and then summarize for the General Ledger.
 

General Ledger spending is pooled and allocated based on a defined set of drivers.

Allocations are determined by pooling costs from the General Ledger by either functional or support department. Functional departments directly support manufacturing activities, while support departments include areas like human resources or IT and can have a recursive nature.

Calculating overhead and labor rates requires actual spending and BOM and Routing data.

The hours consumed by both machines and labor during the manufacturing process are divided by the pooled actual spending from the appropriate General Ledger accounts to calculate labor and overhead rates.

By connecting detailed Routings and Allocations, the Ecosystem model can dynamically build rates based on the appropriate drivers.

The routing defines the process steps and work centers involved in manufacturing a specific product.

Each route has a set of machines, and those machines have crews that support them. Multiple routings, machine efficiencies and capacities, job shifts, and hourly labor rates are all inputs required to calculate the cost of Direct Labor.

Routings hold a host of detailed production information. The Ecosystem model design opens the door to adjusting any production process input and see the effects of overall profits.

The bill-of-materials (BOM) is a detailed list of the materials and components required to manufacture a product.

To calculate product costs, the BOM consumes raw materials which in turn consumes commodity materials. Multiple BOMs, material substitutions, yield and scrap percentages, and commodity prices are all inputs required to calculate the cost of direct materials.

Ecosystem models include detailed BOMs that allow the adjustment of any material input to see the effects on overall profits.

Calculating Standard Cost means detailing the costs associated with Direct Materials, Direct Labor, and Factory Overhead.

Direct Materials comes from the Bill of Materials (BOM) and identifies the list of components and quantities needed to produce the item.

Direct Labor is calculated from the Routings information that defines the crews needed to support the machines used to produce the item.

Factory Overhead uses the calculated rates and allocated spending to assign costs as the item moves through departments.

Most costing processes require calculating, comparing and maintaining more than one type of standard cost.

When the period closes, actual spending is allocated to products using calculated rates.

Actual costs are calculated at the end of the period when actual spending amounts are collected and pooled from the general ledger and allocated using the calculated overhead rates. Like standard costs, actual costs are divided into three buckets – Direct Materials, Direct Labor, and Factory Overhead.
 
There’s more than one way companies calculate “actual cost” depending on the data points available.

Actual and budgeted spending is captured at the account level in the General Ledger.

When the period closes, information from the General Ledger is allocated using drivers to pool costs to both functional and support cost centers. For support centers, recursive costs are also assigned based on rules until every dollar is assigned to a department.

Every critical accounting process touches the General Ledger and Chart of Accounts.

The General Ledger is the primary accounting record for the company, providing a complete record of all financial transactions of the company. The chart of accounts in the General Ledger defines all assets, liabilities, and owners’ equity accounts and serves as the foundation of the company’s financial reporting.

Aligning manufacturing and post production activities with the P&L exposes profitability at every level.

Each Cost-to-Serve activity becomes a line item on a product-level profit & loss statement, with the revenue calculated using the data at the order line item level. Combining these results with the Cost of Goods Sold value makes it possible to view profitability at the individual manufactured SKU level.

The cost to get products to customers is accumulated through the steps, or activities, required to move the items.

Each Cost-to-Serve activity becomes a line item on a product-level profit & loss statement, with the revenue calculated using the data at the order line item level. Combining these results with the Cost of Goods Sold value makes it possible to view profitability at the individual manufactured SKU level.

The Cost-to-Serve “V-Diagram” defines the relationship between the customer and the product through the order line item.

Costs continue to accumulate after production is done.

Once an item is produced, there is a set of Selling, General & Administrative (SG&A) costs associated with moving the items between warehouses and distribution centers, marketing and selling products and ultimately delivering the products to the end customer.

This spending is pooled from General Ledger accounts by functional or support cost centers and allocated based on rules and drivers and allocated to the activities required to move the product to the customer.

Both cost and unit variances provide insight into overall performance against the base comparative.

Calculated variances can include any number of comparisons like ‘standard vs. actual’, ‘budget vs. plan’, or ‘period 1 actuals vs. period 2 actuals’.

Once calculated, variances are typically assigned to an adjustment account in the General Ledger or reallocated to products or product categories for full absorption.

Valuing inventory includes managing multiple types of inventory accounts simultaneously.

Ending inventory from the previous period becomes the starting inventory amount for the current period. Adding the number of items produced and backing out the number shipped produces the new ending inventory for the period which is multiplied by the standard cost to determine its value. Specialty accounts are tracked and all adjustments to inventory are represented in the appropriate General Ledger accounts.

Exchange rate shifts can create misleading cost and profitability results.

Multinational enterprises (MNEs) need a way to compare performance without the noise of shifting foreign exchange rates. Normalizing the data isolates currency effects and removes their influence on material prices, labor costs and other inputs.