A Cost Study’s Impact to a Manufacturer’s Bottom Line
November 2, 2015
Performing a cost study can be very beneficial to a manufacturer’s bottom line. Costing is an essential process that allows a company to carefully track how money is being spent over the course of production and distribution. In fact, every owner of a manufacturing business should be able to answer the following questions:
These are just some of questions you can have answered by having a cost study. Manufacturing cost accounting covers several tasks that have an effect on production and the value of inventory, both of which can have great impact on the profits of your business, as well as bring it in compliance with applicable accounting standards.
There are several reasons to have a cost study performed, most of which fall into a few buckets:
Defective Cost System
You may have some pain points associated with the costing process you already have in place, such as the restatement of profits due to inventory adjustments or uncertainty about what your profitability is by job type. Or, perhaps you have experienced overall lost opportunities due to an ineffective or deficient costing system that doesn’t take all direct and indirect costs into account. You’ll need to correct the costing problems that lead to margin slippage.
Inadequate Costing System: Avoiding Surprises
How do you notice something missing when none of the pain points mentioned above have occurred—at least, not yet? This is when the knowledge of an external professional advisor can make a meaningful difference in the company’s profitability. A professional can draw on his or her past experiences and recognize that something is inaccurate or missing. For example, indirect costs usually capture moving product within a manufacturing operation from stage to stage; is this cost being captured in your bill of materials? Is the depreciation on the tow motor also being captured? Eventually, an inadequate costing system is going to catch up to you since outputs are only as good as the inputs into the system. Avoid costly surprises down the road by letting your advisor identify and fix the problem then monitor it in the future.
Business Process Conflicts/Interruptions
Your costing system may be humming along just fine, but situations occur that call for the system to be reviewed or revised. Perhaps there is disagreement among management members about the accuracy of the cost system currently in place. Another reason could be the implementation of a new ERP system. Both scenarios call for an outside expert to recommend a costing system that all parties can trust and use. You’ll end up with a much better utilization of the ERP system and an improvement in reporting management information.
Looking for more information about accounting for manufacturing businesses? Contact Melissa L. Horne at 404-874-6244 or fill out our form for more information.
If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.CONTACT AN ADVISOR
Subscribe to our newsletters to get inside access to timely news, trends and insights from Smith + Howard.