Introduction to Cost Tracking in Manufacturing
Since the dawn of the industrial age, tracking production costs has been a major challenge for accountants. Early inventory systems focused on historical costs, which suited retail but not complex plant floors. The evolution of costing methods reflects manufacturing’s growing complexity.
Why Standard Costing Became the Industry Norm
- Originated in the 1920s to allocate indirect costs.
- Designed to address significant labor costs prevalent at the time.
- Uses allocated indirect costs, resulting in cost distortions but manageable in high-volume, labor-intensive environments.
Changing Manufacturing Costs: The Decline of Labor and Rise of Overhead
Manufacturing today has evolved significantly:
This shift drove the development of new costing methods.
Activity-Based Costing (ABC): Addressing Overhead Distortions
- Introduced in late 1980s by Kaplan and Bruns.
- Allocates costs based on multiple activities, not just labor.
- Provides insights but is complex and often impractical for real-time costing.
Common Pitfalls of Activity-Based Costing in Manufacturing
Example: Cost of purchase orders in purchasing departments.
- Cost drivers can oversimplify costs (e.g., dividing total purchasing costs by number of purchase orders).
- Ignores fixed vs variable cost distinctions.
- Software promises savings that often are unrealistic due to fixed cost structures.
Importance of Variance Analysis in Standard Costing
Standard costing requires constant evaluation through:
- Purchase price variance
- Material usage variance
- Overhead variance
Modern ERP systems enhance this analysis by breaking variances into price and efficiency components.
Understanding Price and Efficiency Variances in Manufacturing
Maintaining Accurate Data for Inventory and Production Reporting
- Shop floor data integrity is critical.
- Firefighting with inaccurate bills of materials or routing impacts inventory availability.
- Proactive focus on data accuracy supports perpetual inventory systems.
Choosing the Right Costing Method for Your Manufacturing Environment
When to Use Standard Costing
- High volume, standardized production.
- Easier variance analysis and cost control.
When to Use Actual Costing
- Custom job shops and make-to-order manufacturers.
- Detailed tracking of direct costs by job.
- Modern ERP systems enable job-specific cost tracking.
Challenges with Actual Costing in Manufacturing
- Increased complexity in issuing materials and purchases to jobs.
- Manual issues common in lot-controlled environments.
- Actual costs reflect direct job costs but may exclude fixed overhead.
- Overhead allocation still necessary (labor hours, machine hours).
Best Practices for Overhead Allocation in Actual Cost Systems
- Charge all job-specific costs directly.
- Allocate remaining fixed and variable overhead costs appropriately.
- Use cost drivers aligned with production activities.
Reporting Considerations for Manufacturing Costing Methods
- Actual costing provides job-level margin visibility but complicates trend analysis.
- Standard costing simplifies input cost variance identification.
- Discipline in sales and engineering needed to reflect cost changes in pricing.
Leveraging ERP Systems for Manufacturing Cost Management
- Modern ERP systems offer powerful costing and reporting tools.
- Complexity in cost allocation remains a challenge.
- System upgrades are opportunities to reconsider costing methodologies.
How Meaden & Moore Business Solutions Can Help Manufacturing Companies
- Analyze current costing and reporting processes.
- Develop improved margin management reports.
- Assist with ERP data conversion, migration, and costing method selection.
Contact a Meaden & Moore Expert for Manufacturing Costing Solutions
Upgrade your costing methods and ERP systems to improve accuracy and efficiency. Contact us today to learn how our experts can help you streamline your manufacturing cost tracking and boost profitability.
