Cost Accounting in Manufacturing

There’s nothing worse in today’s economic climate than watching your profits get nibbled away by a bunch of little things at the periphery of process. Employees consistently take excessive amounts of time to find tools between setups, your scheduling scheme leaves production at less than capacity, one job rakes in significant profits while those profits are then erased by the losses incurred by another job.

What is needed in your manufacturing or job shop operation today is the means by which you can ascertain what aspects of your operation are non-value added activities. As well, it would be good to identify your core, most profitable, profit centers. To well-manage the modern manufacturing operation for maximum ROI, costing models must be employed to ensure an understanding of what is going on throughout all processes.

To build understanding requires information, actionable data that guides management decisions. Used often as a term interchangeable with Cost Accounting, costing is the process to gather this data, measure it, interpret it, and eventually report it as feedback to decision makers and company stakeholders. What you’re after is a sense of what the actual cost is for any individual program or activity in the production process. Indeed, non-value added activities ultimately erode profitability. Costing takes its information from all aspects of the operation (e.g., inventory, shop floor, purchasing, front office, shipping, etc.), and then runs it through a series of scenarios and equations to measure the profitability of each.

To the extent that such costing efforts are routinely tasked, the results can have a tremendous positive effect on the overall bottom-line of a company. For example, some financial officers run cost accounting at the end of every month, while some run costing daily to see what’s working and what’s not.

In short, this is simply the notion of knowing what you know, and then doing something about it. This is not to say that there will always be changes to process costs. Indeed, some costs (such as tooling, mortgage/depreciation, quality control, etc.) will remain stable as fixed costs even during busy periods, as opposed to variable costs which flex with volume of work (such as direct labor, bulk material purchase breaks, shipping/distribution, etc.). Fixed costs are increasingly more valuable to managers as their values are assigned in percentages to products being manufactured; the wrong assignment, though, of fixed costs to a variety of unrelated products produced under the same roof often misguides other factors such as fees and product pricing. This is particularly true when the manufacturer sees itself as part of the larger Supply Chain. That is to say, as one vendor mismanages cost accounting with regards to pricing, the same error replicates itself exponentially up the stream. In this way, Cost Accounting can be seen as translating the Supply Chain into financial values.

It is in terms of capacity where Cost Accounting makes its greatest impact for manufacturers today. Also called throughput accounting (revenue less variable costs), such costing seeks to make the most use of the plant facilities through scheduling. With the maximization of throughput, the amount of products going out the door in a relative period of time determines profitability. In other words, there is usually a direct correlation between capacity and profitability. The goal is to create a stasis between not making enough product to make a profit on a particular job, or accepting a job that will exceed capacity and therefore cause other problems (e.g., missed on-time delivery, quality, etc.). Also, this will be able to identify those jobs that in and of themselves are unprofitable for many other reasons. For example, running a job on a machine that uses more energy and manpower than estimated in the quote.

This is just a very brief and nutshell overview of a manufacturing tool that is both simple in principle yet complex in execution. Because it is often such a massive undertaking with regards to data collection, manufacturers are increasingly turning to enterprise resource planning software that automatically collects the plant information from the variety of work centers, and then quickly and easily produces costing reports. But, no matter how you engage cost accounting, the bottom line for any operation is that you must know what you know (through costing), assess that knowledge, and then do something about it to produce positive and profitable results.

Consultant of Lean Manufacturing

Companies of all sizes are now implementing lean manufacturing. Businesses as small as a dentist office are blogging about using lean manufacturing techniques to improve the process and lower costs.

If a company is contemplating hiring a lean manufacturing consultant, they probably need one. If the expertise does not exist within the corporation, valuable time will be lost and money spent unnecessarily until the lean manufacturing consultant is hired.

If the company has lean manufacturing expertise in-house, the question then becomes one of execution and implementation. Can the in-house expert execute the lean implementation plan within the required time frame and budget? Additionally, will the expert receive the required management commitment to implement lean manufacturing?

It is common to see organizations hire a consultant and commit the resources that otherwise not be committed. Is that fair to the in-house consultant? No, but as they say, “it is what it is”. If it takes an outside lean manufacturing consultant to launch a system of massive waste elimination and value creation, does it really matter in the long run?

From a corporate view, all that matters is that the waste elimination occurs and value is created.

Lean manufacturing consultants are often good at motivating the organization into action. Sure, one reason is the corporation is paying for services so it is more compelled to make the most of it. Also, unless the lean manufacturing consultant is going to be paid to wander around, the corporation will probably make a concerted effort to implementation.

If the organization has an in-house lean manufacturing expert and top management commitment, the only reason to hire an outside lean manufacturing consultant would be for additional resources or ideas. A good outside consultant has seen many improvements in various types of organizations with different products. The consultant has undoubtedly witnessed or been involved with a few failures, and thus has the experience and knowledge to prevent or minimize it.

The first step in determining the need for a lean manufacturing consultant is an operational analysis. All areas of the organization should be assessed, including manufacturing, maintenance, engineering, shipping, purchasing, administration, and sales. The magnitude of the waste should be quantified.

Upon completion of the assessment, the need for a lean manufacturing consultant will become transparent.

It is critical for the organization and managers to keep an open mind. This cannot be mandated, but encouraged through written examples, benchmarking visits to and from other companies with successful lean manufacturing implementations.

It is not uncommon for a good lean manufacturing consultant to reduce cost of good sold by 10%. This extremely large number should not be shown to the entire organization up front. It shouldn’t be hidden, but any large number would initially bring fear into the organization.

All lean manufacturing implementations should be preceded with a promise of no job loss as a result. The company should be up front and hones about waste elimination, job combinations, and position elimination, but should also commit to keeping all employees through the process.

Obviously, potential outside circumstances would not permit a guarantee, but if a corporation wants total involvement and maximum success, they will not put people out of work as a result of a lean manufacturing initiative.

When positions are eliminated through lean manufacturing tools, those employees should become part of the 5S or kaizen teams. This only increases the resources and focus enabling more waste elimination.

Almost all successful lean implementations will lead to business growth, enabling the displaced workers to again become direct labor.

When companies “do the right thing”, they are almost always rewarded. The excellent morale and pervasive commitment will fuel additional business, products, or markets.

Manufacturing Software

The fenestration industry refers to those involved in the design and production of windows and doors. In the manufacture and production of products from the fenestration industry, as in many other industries, it requires cost effective processes that are able to adjust to varying consumer demands, productive capacities and inputs, as well as challenges in the supply chain and changes in consumer preferences. One such software, which has been proven to provide businesses a competitive edge through the efficient use of monetary, human and input resources, while empowering the business to vary product designs to suit changing consumer demands and industry trends is manufacturing software.

The fenestration industry is experiencing turbulent times in respect to constant demand changes for new and innovative products, in reaction to external factors such as energy efficiency, style predilections and raw materials that produce the final products. To remain competitive in the marketplace, door and window producers must ensure that their business remains flexible in addressing the constantly changing environment in which they operate. There is no point purchasing software which provides ‘lock-in’ to its capabilities, with limited scope for flexibility in its use. Leading manufacturing software not only creates a streamlined and productive sales, marketing, management and manufacturing tool; it has a level of functionality which allows it to grow as your business does, and react to market trends.

Energy efficiency in the design of homes and buildings has created natural flow-on effects for the fenestration industry, where the design, process inputs and production process itself has to adjust to meet the legislation, ethical and sustainable responsibilities as a company and trends exhibited in the market for a desire for greater energy and resource efficiency. These issues have been transforming the fenestration industry for many years, which can be seen over a 50 year period of commercial window manufacturing where advancements from steel frames and monolithic glass has given way to thermally broken frames that hold insulating units with glass and coatings designed to spectrally reduce heat transfer while maximising natural daylight. With regulations referring to the efficient construction of new buildings, high quality fenestration products are often specified in the original design of the project, meaning that those producers who have not got the capacity to meet the new demands will not even be considered for such projects.

Ensure that your productive capacities are able to change with the times, while at the same time improving the efficiency of production, output and conversion of potential customers to actual sales. Get the right tools in the right place and enquire about manufacturing software today.