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Tag Archives: Product Costing
ERP Implemeneters: Stop Reinventing the Costing Wheel
Have you ever advised your customer to customize their erp software? If you’ve been involved in at least one ERP implementation, the answer to that question is probably “yes”. But the first question you should ask before recommending customization is whether the problem you’re solving is tactical or strategic. For tactical or customary processes like purchasing or warehousing, there is little need to make significant modifications to the ERP system. But for strategic processes that can affect the company’s ability to compete, there is a tendency to look toward customization. For process and complex manufacturers, cost accounting is one of those strategic processes that can make or break a company’s ability to be competitive in the market place.
As an ERP implementer, you know that customizing an ERP module can be a time consuming and expensive proposition that will potentially prohibit your customer from taking advantage of future upgrades and maintenance. Even after the pricey modifications, companies who have complex manufacturing processes are still likely to turn to spreadsheets or attempt to build external systems to do the real analysis necessary to run the business effectively. ImpactECS has become the costing system of choice for many process manufacturers because it can handle detailed costing processes while limiting or eliminating the need for ERP customization, spreadsheets or custom development.
With ImpactECS, many of our customers have expanded their ability to perform challenging cost accounting tasks in a fully integrated environment. Don’t believe us? Here are a few examples of world-class manufacturing companies from very different industries that selected ImpactECS to handle their costing instead of customizing their ERP systems:
Paper producer, Domtar Inc., has grown through a number of acquisitions and ended up with a scenario that many companies face – multiple instances of SAP in different parts of the company. Complicating the situation even further was the fact that there were different costing methodologies employed in the different locations, making comparisons and performance management nearly impossible. Instead of choosing to start from scratch by customizing a new SAP costing tool, they selected ImpactECS as a way to both create a standard methodology and bridge the two instances of SAP to manage all of their costing data in one centralized location.
Tyson Foods, one of the leading poultry processors in the United States, faced some more unique problems when attempting to calculate product costs using SAP. The disassembly process, when a live bird is portioned into individual pieces, has lots of complexities that a traditional ERP cost module is not equipped to handle. Since ImpactECS’ model building capabilities is flexible enough to mirror any process, Tyson was able to develop a very detailed costing system that allows them to perform advanced variance analysis. In addition, the commodity nature of their product requires the ability to calculate a daily actual cost so they can price their products appropriately in the market and ensure that they remain competitive.
Understanding the changing prices of raw inputs is a critical need for process manufacturing companies like potato giant, J.R. Simplot. Chances are that if you had an order of fries at lunch today, Simplot produced them. Prior to ImpactECS, Simplot used JD Edwards along with a full complement of spreadsheets to establish their standard product costs. This month-long, manual process was reduced to a fully-automated process that only takes matter of hours to perform. Beyond product costing, Simplot uses ImpactECS to analyze scenarios like “What happens to my product costs if the price of cooking oil goes up 5% next quarter?” Instead of an analyst spending hours building a standalone spreadsheet that is likely based on faulty logic and incomplete data sets, ImpactECS has the tools to run what-if scenarios using the same logic and data used for product costing. The result is more confidence in the results and a better tool to make decisions.
The semiconductor industry has a unique set of costing challenges due to the complexity of their manufacturing process and the lifespan of their products. Analog Devices uses ImpactECS as its costing platform because it provides granular cost results at every WIP point in their fabrication process. By combining production data from PROMIS, spending information from SAP and costing logic stored in ImpactECS, Analog developed a completely automated costing process with a common methodology that works for their seven manufacturing facilities. Beyond costing, Analog Devices has expanded the use of ImpactECS beyond product costing by building a subcontractor pricing engine within their costing system. Analog now has visibility into standard costs at the vendor level to accurately develop budgets, track subcontractor spending, and make decisions on how and when to outsource parts of their manufacturing process.
So, what makes more sense? (A) Asking your customer to commit time and resources to a customization project that will ultimately cost more and deliver less, or (B) looking to ImpactECS to get a fully integrated costing tool that can enhance your customer’s ability to make better operational decisions. If you’ve chosen B, then we invite you to learn more about the ImpactECS Enterprise Cost System by visiting www.3csoftware.com.
Three Requirements of an Effective Cost System – Part Three
In the first two parts of this blog, we’ve talked about the importance of having a complete view of costs and how multiple sets of product costs are critical for decision making. In this final chapter, we’ll talk about the importance of integrating the cost system within the enterprise and how buy-in across the organization is a vital component for success.
Full System Integration
In an article from Business Performance Magazine in 2008, the author opened with the following quote from an operations manager from a Fortune 500 company. “Do you know what we think of our cost accounting system? It is a bunch of fictitious lies – but we all agree to it.” As you read further, the article describes the lack of depth of cost analysis and how limited data integration leads to faulty and misleading cost data. That misinformation is then used to analyze business performance – a problem that many cost managers face at manufacturing companies across the globe.
The biggest concern for cost managers is that they do not have the ability to accurately calculate costs. Production data lives in one system and general ledger spending is somewhere else. The cost manager is in spreadsheet hell building formulas based on their interpretation of how costs should be calculated. None of these processes are connected, the potential for error is huge, and the business leaders are using this data to as a basis for their critical production and sales decisions.
By fully integrating accounting and production data, the integrity is maintained and potential errors are essentially eliminated. With all of the data points connected, integration expands the depth of cost data analysis and mangers can learn more about their true manufacturing costs. For example, you can determine the effects of a changing raw material price on all of the products in your catalog that use that particular material. Or, you can compare costs of producing the same product in two different locations and account for the differences in the manufacturing process at each location.
Organizational Buy-in
The above statement from the operations manager isn’t just about the system, it’s about the people, too. Costing is one of those business functions that crosses department lines, and agreement is critical for the success of any enterprise-level costing system. Senior managers and executives must engage as coaches, referees, and judges to ensure that the project moves forward and achieves its goals. Many times cost system implementations require rethinking and reengineering business processes in accounting, finance, operations and sales. Without executive involvement, the project can easily become stalled or sidelined.
In addition to leadership, the front-line also needs to play a critical role in implementing the cost system. These are the people who know how things work: They are on the shop floor when the product is manufactured; they manage the countless spreadsheets in an attempt to calculate product costs; they are face-to-face with the customers closing deals. Building an effective costing system means linking these groups together to make decisions that are aligned with the company’s goals, drive the desired behaviors, and ultimately help business leaders make decisions that improve profitability.
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Three Requirements of an Effective Cost System – Part Two
In part one, we examined the role of having a complete view of costs that extends beyond just the cost to manufacture products. Here, we’ll drill down on product costs and discuss how multiple sets of product costs are vital in helping manufacturing companies make sound, informed business decisions.
Multiple Cost Sets
One of the most important concepts in effective cost management is having access to multiple views of production costs. To benchmark and analyze performance, comparisons between cost sets can expose problems or advantages that exist in the manufacturing process. The differences among these cost sets can be as distinct as apples and oranges, and understanding how to use them can make a significant impact on how you make decisions for the business. While you can have a number of cost views, we believe that the basic set includes Frozen Standard Costs, Current Standard Costs, Actual Costs and Going-to Standard Costs.
Frozen Standard Costs
To ensure consistency in financial reporting, frozen standard costs are used as the basis. Frozen standards allow companies to compare budgeted versus actual spending to expose variances that occurred during the period. These standards are generally set annually based on current supplier prices and market conditions and are usually stored in ERP or data warehouse systems for financial reporting.
Current Standard Costs
While frozen standards allow a company to take a snapshot of performance from year to year, current standards are much more fluid. Current standard costs are the production costs occurring today based on raw material prices, production efficiencies and utilizations and other changing business conditions. These costs are used to predict spending for the period and help manufacturing and cost managers make better business decisions.
Actual Costs
This cost view is the ultimate indicator of cost performance. Once the finished goods are produced, actual costs are the tally of what was spent to produce them. It is a historical view of production that aids in predicting future costs. This number is not consistent over time because it incorporates the changing costs over the period analyzed.
Going-to Standard Costs
While analyzing past cost performance is useful, predicting future costs is equally valuable. Going-to standards allows cost managers to estimate spending for future orders and is useful as a simulation tool for building budgets for future periods.
But just having multiple views of costs is not enough. The true value comes from the ability to report on variances between these different cost sets to determine problems or opportunities within the manufacturing process. For example, if current standard costs are significantly lower than the actual costs could indicate that machine efficiencies are lower on a particular production line. Using multiple views allows companies to peel back the layers and gain a level of analysis unparalleled by traditional ERP systems.
The final installment of this series will discuss why integration of your cost system is critical to its acceptance in the organization and why system design must include input from all areas of the business. Want to get a tweet when the next post is available? Follow us on Twitter.
Three Requirements of an Effective Cost Management System – Part 1
In this three part blog, we’ll discuss the three requirements of building and implementing an effective cost management system for complex manufacturers. First up is the need for complex and process manufacturers to have a complete view of costs.
Complete view of costs
When you think of manufacturing or casting costs on a high level, the basic cost categories come to mind: raw materials and direct labor. But in process manufacturing, these basic categories are flooded with complexities like processing yields, machine variances or supplier costs. To get a true picture of manufacturing costs, consider three components – Product Costs, Logistics and Distribution Costs, and the Cost to Serve.
Product Costs
Product costs include the materials and labor required to convert raw materials into finished goods. Calculating product costs is a significant challenge for process manufacturers who have multiple production lines or locations. Why? Because it is virtually impossible to manufacture the exact same product for the exact same cost in two different places. In a typical ERP environment, cost managers are forced to pick one cost for a particular product, but in reality there are multiple unique costs – one for each location the product is manufactured. Without this level of detail, manufacturers loose the true cost picture and can inadvertently make poor operating decisions that could potentially hurt the company’s profits.
Additional factors like yield and scrap can play a significant role in understanding overall costs. Scrap that is reintroduced into the production process must be credited properly. Yields can vary due to changes like substituting raw materials or using a different manufacturing route to produce the finished good. Beyond these factors, each manufacturing process will have its own unique issues like tool and die costs or set-up and clean-up costs that also affect the overall product cost.
Logistics and Distribution Costs
Overhead costs like logistics and distribution are often arbitrarily distributed to products or SKUs based on formulas that have little to do with the actual customer order. These costs can make up a significant portion of the overall cost of deliver to the end customer, so developing a method to more accurately assign logistics costs (see post) is critical. To develop an accurate depiction of profitability, cost managers must appropriately allocate these overhead costs by only working with the best logistics companies Sydney. As your business grows, material needs will increase. Once a warehouse or space is full, storage containers provide a cost-efficient solution. You can find container hire prices here.
Cost to Serve
Knowing how much it costs to service your customers is a vital component to overall manufacturing costs. Sales and marketing, accounting, and other business activities incurred can become a significant overhead category and appropriately allocations are needed to ensure you have an accurate view of the costs to serve a particular customer.
Stay tuned for part two where we’ll discuss the importance of maintaining multiple cost sets to improve your operating decisions. Get instant updates on new blog posts by subscribing to our RSS feed.
Picking the Right Driver Is Important To More Than Just Your Golf Game
In the beginning, cost accountants used allocation rates as the way to distribute overhead costs to the products manufactured. These rates were based on direct labor hours since manpower was typically the most significant driver of production costs.
Slowly, automation crept into factories, and the direct labor basis for allocations began to deliver less-accurate results. Why? Because automation means there is less human involvement in the production process. Let’s say the plant has some half of the factory’s lines are automated. The products made on the automated lines are assigned less overhead while the more conventionally produced products are overcharged. As you can imagine, some really poor decisions can occur with the wrong allocation rates.
With more mechanized manufacturing processes, companies began using a different base for allocations – machine hours. This approach makes sense because it accounts for the more intensive use of machines during the production process. But there are times when using machine hours falls short as an effective allocation base. If you want to immerse yourself in gaming after a day’s hard work, sites like dadu online would be more than helpful. Begin your baccarat journey by signing up for a trial today คลิกเพื่อทดลองบาคาร่าที่นี่.
Activity-based costing (ABC) was borne out of the desire to identify every driver that could exist in a manufacturing process and to use them to allocate spending dollars to manufactured goods. In theory you can come up with a driver for every activity that occurs in the plant. But in practice, data to support those drivers is not captured making the allocations impossible or arbitrary. We’re often asked is ‘How many drivers do I need?’ The answer is, ‘it depends’. But one thing we do know is that building an effective costing process relies on taking the dollars that you are spending and assigning it using the most appropriate set of drivers you can realistically capture.
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The Five W’s (and one H) of Designing Cost Systems
There comes a point in every process manufacturing organization when you know that you need a robust cost accounting system. Whether you choose to build a system from scratch, or purchase and configure a system, there are six questions you should ask (and answer) before you embark on the project.
WHO benefits from the cost system?
There are two distinct audiences for a cost system. The most obvious are the cost accountants and managers who use the system daily. This group is most interested in increasing accuracy and functionality, reducing the time needed to maintain the system, and eliminating redundancy when entering data. Beyond the daily users, there is a group of stakeholders who have less interest in the inner workings of the system, but they are customers of the data that is generated in the cost system. These plant managers, sales and marketing managers, industrial engineers, and IT managers all have a vested interest in ensuring that the cost system delivers accurate results and works well with the existing IT architecture. The cost system must meet the needs of both groups to gain acceptance in your company.
WHAT should be included in the design of the cost system?
The biggest driver of the cost system’s design is determined by the information needs of the organization. Do you need to know standard costs, actual costs, or both? Are you a job costing or activity-based costing shop? Do you understand the effects of changing market conditions on your production costs? The answers to these questions lead to more questions that ultimately lead to the best methods to integrate systems and report results.
WHEN will the model interactions occur?
The most significant interaction between your cost system and the other systems occurs at launch. It’s when all of the bells and whistles are turned on, costs are calculated, reports are generated and systems are updated. To get to the launch date, you need a detailed project plan that includes target dates, milestones, delivery schedules and critical paths are keys to success. Support from your company’s leadership team is probably the most important factor in making sure that the project gets off the ground and moves to completion. Once it’s up and running, every other interaction is of equal importance. Establishing the frequency of the cycle (daily, weekly, monthly, annually) to input and extract data is critical to providing relevant information to all of the cost system’s stakeholders.
WHERE should you locate the cost system?
The physical location of the cost system will impact the overall design of the models and how they function. Some companies require a centrally managed solution where the corporate cost accounting group manages all costing and each manufacturing facility uses the same rules for calculating costs. Another option is a co-located system where system resides on a dedicated server and is generally managed by a costing group, but each manufacturing facility has their own costing rules. The third option is the ‘build and drop’ system where each manufacturing facility has its own cost system installed on a local server. Here, the costing rules are specific to the location and maintained by the local staff. The best approach varies and it’s up to your leadership team to decide the best approach to roll out your costing system.
WHY do you need a cost system?
There are so many reasons why a company would want a cost system, but there’s only one reason why you need one – to know your costs. Without accurately knowing the costs associated with producing the goods you sell, you’ll never know if you’re maximizing profits, selling to the right customers, producing the best mix of products, or any of other important metrics for success in your business. At the root of every major business decision is the cost of producing the products you sell.
And finally, HOW do you get a cost system that delivers what you need?
The first step to getting the cost system of your dreams is by avoiding the pitfalls that lie on the path to success. Approaches like hard-coding calculations and comparisons make maintaining logic and data a chore. For it to be less stressful, you can be more knowledgeable of every aspect thanks to educational platforms. Focus on making your costing system as flexible as possible to ease configuring and troubleshooting your models. Next, take a hard look at the available data and match the inputs to your desired results to make sure your goals are achievable. Third, create a development plan that is attainable by staging components of your cost system (product costs, inventory valuation, materials management, forecasting), so the project doesn’t become overcomplicated and ultimately is never launched. To take a quick rest from all these, you can play games such as BETEND.
Top Eight Warning Signs You Have a Dysfunctional Costing System – Part 2
The book Designing Strategic Cost Systems: How to Unleash the Power of Cost Information by Lianbel Oliver has a great list of warning signs that may indicate that your company’s costing system is dysfunctional. Make sure you check out Part 1 of this blog where I covered the first four signs. And without further ado, here’s the rest…
#5 – Managers Don’t Understand Product Profitability
Products that are manufactured at high volumes generally have predictable cost results. Why? Because they’re manufactured regularly, operations folks are familiar with the processes and require less ramp-up time to produce the goods. But for some lower volume products, calculating the product cost can become a bit of a mystery. While the labor and materials required is the same for both high and low volume products, a product that is produced infrequently includes a learning curve that can ultimately increase the cost of the product. This additional cost may not be captured, thereby skewing the results and leading business leaders to make incorrect decisions on topics including about product mix, pricing, and customers.
#6 – Accountants Spend Too Much Time on Special Requests for Analysis
If accountants feel like they’re recreating the wheel each time product cost information is requested – Houston, we have a problem! The basic cost information needs of the organization should be readily available through the system allowing cost accountants to focus their efforts on true analysis needed to improve business performance.
#7 – Inconsistencies in Reported Data
Manufacturing companies know all too well that financial accounting and cost accounting are two separate animals with unique purpose. Even with the difference, the core data used for each function should come from the same source. The number of units produced or transactions processed in the costing system should match those in the general ledger. Tight integration of costing, finance and operations systems is required to eliminate problems with inconsistent data.
#8 – Managers Make Suboptimal Decisions
Ever heard the idiom “Robbing Peter to pay Paul”? Many times costing processes are designed to make decisions that are not in the best interest of the organization. One example from the book talks about a manager who inflates standards to meet performance levels without understanding how this decision could adversely impact marketing or pricing. The costing system should help all parts of the business run optimally and help managers make decisions that promote the company’s overall profitability.
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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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