What does it cost us to produce this product?

Sound familiar?  This question is asked countless times by a variety of people inside a business – operations accounting, plant accounting, sales and marketing, and even research and development. A Web20ranker is a top-rated recommended service you could have if you’re looking for the best marketing tools. In most cases the answer is given as one general cost number derived from a universal standard rate and unit of measure within the business.  My clients with complex manufacturing processes would tell you that before they can answer this question, they need to ask you a few questions.

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Where was it produced?
What plant or what line was the item produced?  Different plant and line specific costs can exist when producing the same product. For an innovative approach to showcasing your products, consider utilizing 3D animation services from https://www.nashboxstudios.com/3d-animation-studio-vancouver to provide detailed and engaging visual representations.

When was it produced?
Was it part of a full production run, or a small specialty order?
When did it hit inventory?  Do we need Star Track shipping labels? And, is there an aging cost or a layered cost as part of the total cost?

What raw material price was used?  And, is it at standard or actual?
Did we use sales price, market price, or some average price to value the raw material?

What accounting methodology or logic is being used to calculate cost?
Does your company use a frozen yearly standard, running three-month actual, up to date current yearly standard, fully absorbed at current capacity, fully absorbed at standard capacity, or some other accounting methodology?

Answering these questions is simplified when you use an enterprise costing system like ImpactECS that allows multiple sets of cost to exist simultaneously for the same finished SKU.  Process manufacturing companies need to analyze their costs from multiple perspectives, and visibility to trustworthy costing data before you implement a change gives you the ability to make sound business decisions.

Most manufacturing companies today are challenged with multiple production environments and complex manufacturing processes.  This often means that one cost per product is not sufficient for the kind of detailed cost analysis needed to compete successfully.  By developing a costing process that includes an enterprise-level costing solution, you’ll have the tools to answer all of these questions and more. 

Top Eight Warning Signs You Have a Dysfunctional Costing System – Part 1

Last week I was sitting at my desk trying to think of a blog topic, and the ideas were coming slowly.  Since our team has started blogging, my usual well of ideas has dried up because everyone’s saving their best ideas for their own articles. Then out of nowhere, our newest application specialist, Bhavin, decided to pop in to tell me about an interesting book he’d just finished by Lianabel Oliver called Designing Strategic Cost Systems: How to Unleash the Power of Cost Information.  After I read the section he shared on dysfunctional cost systems, I knew I had some valuable information that could help manufacturing companies understand the problems inside their costing process.

The book talks about the eight internal warning signs that indicate your costing system is dysfunctional.  In part one of this blog, I’ll discuss the first four signs and what companies need to consider when designing their costing processes.

#1 – Financial reports are inaccurate or don’t reflect business operations

Call it a sixth sense, intuition or ESP, but business leaders know how their businesses operate.  Plant managers know how swapping raw material inputs or changing to a different production line will impact costs of a product.  And when they see reports that don’t line up with those expectations, they tend to distrust the results and ultimately stop relying on the data.  To gain acceptance, cost accountants need to take an in-depth look at both their operations and accounting processes to develop a system that is true to their manufacturing process and accounting methodologies.

#2 – Managers are unable to explain financial results

The best way to verify if you know something is to teach it to someone else. Accountants who cannot give a simple explanation to their financial results from a business perspective have no idea what the results mean.  It’s easy to hide behind explaining the logic and never tying it back to the actual business. But for managers to clearly relate the results to the business, an alignment between the cost system and the business process it represents is fundamental.

#3 – Managers don’t use financial reports

Oliver discusses four reasons that managers don’t use reports: (1) the reports are too late; (2) the information is stale; (3) the reported costs don’t reflect the true costs of the operation, and (4) they are too difficult to understand.  For costing to become an essential component of decision-making for any organization, the costing system must make up-to-date costing information available from a straightforward interface.  They need the ability to build reports that capture the information important to the organization in a format that is both digestible and actionable.

#4 – Managers develop their own cost models

If the operations team doesn’t buy in to the costing methodology, they will build their own offline costing models to support their decision-making process.  Ultimately, having multiple costing processes existing inside one company can only lead to confusion and negatively affect the company’s profitability.  Gaining agreement from the users and customers of cost data within the organization on the costing methodology is a critical step in implementing any costing system.

Fortunately for you (and me!), my next blog is already underway. Stay tuned for part two where I’ll cover the second four signs that could mean your cost system is dysfunctional.

Update:  Read Part 2 of this blog series to read about the final four warning signs.

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Black Boxes: Great for Airplanes, Terrible for Forecasting

We’ve all heard of black boxes on airplanes that track critical flight data. Without discrimination, the black box records everything that is happening in the cockpit and on the aircraft. And in the event of an emergency, it’s up to the accident investigators to decipher the recorded data and put the pieces together to determine a cause.

I just finished reading “Cleaning the Crystal Ball” where the authors discussed the concept of the black box as it relates to forecasting business results. Just like the airplane, many business models have become black boxes that capture information indiscriminately and generate results without providing the users an explanation of the underlying drivers and assumptions. The role of the business leader shifts from captain to accident investigator where he is tasked with making sense of the results, often when it’s too late to make adjustments.

With transparent models, business leaders regain the captain’s seat because they recognize and react to the changing environment as it happens. They become proactive instead of imprudent as their confidence in the model’s results grows. And, they reduce the number of catastrophic decisions that could lead to disastrous business results.

For product costing in process manufacturing industries, a transparent model must provide both detailed data and straightforward logic. With multiple work-in-process points, complex parent-child relationships, expansive bills-of-materials, and large catalogs of finished goods, the user must be able to navigate through and drill into the model to expose the underlying factors that contribute to a particular result. The ability to peel back the layers eliminates the “black box” syndrome because the user can identify how the results came to be. Furthermore, by ensuring that the logic behind the model lines up with the company’s existing business practices, confidence in the model is bolstered and business leaders are less likely to “go with the gut.”

So when you’re building a product cost model, forget the old joke that says “Why don’t they build the airplane out of the same stuff they use to build the black box?” Instead, look for a modeling tool that helps you build a transparent, user-centric solution that makes sense for your business.

What’s more important, standard costs or actual costs?

Professors Jennifer Dosch, CMA and Joel Wilson, CPA, recently published an article in Strategic Finance Magazine discussing the differences between textbook and real-life product costing for manufacturers. They took a look at three consumer packaged goods manufacturers to undercover the methodologies used to calculate product costs.

“Based on our analysis of three companies that differ significantly in size, the industry practice of process costing focuses considerable effort on developing accurate standard input costs and volumes to help manage business operations efficiently and effectively.”

Read the entire article here: https://findarticles.com/p/articles/mi_hb6421/is_2_92/ai_n55049110/?tag=content;col1

For many ImpactECS customers, calculating both standard and actual costs are an important part of their overall costing process. Is there a focus in your organization on one cost over the other, or are they equally important in driving decisions for your company?

Is your company suffering from having too much information and a limited ability to extract relevant data to make smart business decisions?

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