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.