How Manufacturers are Improving Cost Identification and Management Estimates

BY: ROB STAUFFER, MBA, PMP

Improving cost identification is one of the most crucial elements involved in driving your organization towards operational excellence and success. With the manufacturing sector evolving to a whole new level of functionality, manufacturers now are finding themselves under pressure to optimize budgets, quality and efficiency, while keeping up with the latest technological trends and adapting to market conditions.

Manufacturing facilities must have an effective cost estimate system in place that is up to date with both the latest technologies and processes. A well respected method commonly used is Activity Based Cost Management. Often referred to as ABC Costing, it differs from Traditional Costing (Cost Accounting) in several ways.

Traditional Costing 
Generally, manufacturing companies have utilized Traditional Costing in the past to assign manufacturing overhead to units produced, assuming that the volume metric is the fundamental driver of overhead costs. The problem with this method is that accountants only assign manufacturing dollars to products, failing to allocate costs associated with producing the item. As a result, estimates for cost of goods sold and gross margins can vary drastically when using this method in comparison to using ABC Management. Although Traditional Costing is easy to implement for companies—especially ones that provide a single product—it is considered outdated since a large number of machines and computers are now used in manufacturing facilities. It also does not address other cost drivers that contribute to the total capital expenditure of an item, which can lead to poor management decisions and profit losses.

Activity-Based Costing 
In comparison to Traditional Costing, Activity-Based Costing (ABC Costing) provides a more accurate view of a product. ABC Costing assesses and determines all activities associated with producing an item and allocates a cost to the activity. The allocated cost is then assigned to the products that require this activity for production and completion. This method is highly beneficial because it eliminates the allocation of irrelevant costs to a product and increases a company’s ability to maximize profits. Additionally, ABC Costing allows for transparent interpretation of costs, enabling internal management to better understand overhead budgets and plan accordingly.

Activity-Based Management
Activity-Based Management (ABM) is highly recommended for manufacturers for a number of reasons. First and foremost, ABM was born in manufacturing. Its superior benefits were noticed early on in product manufacturing settings and continue to assist manufacturers by:

• Accurately identifying profitable and unprofitable products.
• Discovering and eliminating needless expenses.
• Easily pricing products to achieve acceptable and profitable margins.
• Identifying the discrepancies between true value added activities and non-value added activities

The Michigan Manufacturing Technology Center (The Center) can assist in implementing an efficient Activity-Based Cost Management System, enabling you to accurately gather data about your operating costs and diagnose any problems. To learn more about our Cost Identification and Management Mentoring services, visit www.the-center.org, or contact me directly at rstauffer@the-center.org.


MEET OUR EXPERT

Robert (Rob) Stauffer MBA, PMP, Senior Lean, Costing and Project Management Consultant
Rob has been on The Center’s Lean team for 10 years. He has trained and mentored Michigan companies in the entire portfolio of Lean Six Sigma strategies and methods specializing in financial analysis, costing, strategic planning and Lean applied to the healthcare industry. He also works with clients on product development, product launches, transactional office processes and sales of technical programs. To read Rob’s full bio, visit www.the-center.org.

Since 1991, the Michigan Manufacturing Technology Center has assisted Michigan’s small and medium-sized businesses to successfully compete and grow. Through personalized services designed to meet the needs of clients, we develop more effective business leaders, drive product and process innovation, promote company-wide operational excellence and foster creative strategies for business growth and greater profitability. Find us at www.the-center.org.