Your cost accounting systems are designed to be a driver of process efficiency – raising cost’s importance in this period of trying economics. Here are three reasons why you should be paying more attention to your cost systems. The focus needs to change from one of absorption and inventory valuation to one of process efficiencies.
Why? Consider the following:
1. Volatile demand. Manufacturing volumes are showing considerably volatility on a period-by-period basis. As many realize, it’s rather easy to show efficiencies as volume expands, not so as it contracts.
2. Process efficiencies. Cost has a large role to play in both driving and capturing efficiencies. There is room for improvement in using it as such.
3. Consistency across operations. In large companies with numerous locations, consistency is essential. Your management team can better manage and perform their primary duties – knowing that the numbers are the same.
How do you achieve an opportunity in how to address all three of these needs? A quick summary:
1. Volatile demand conditions require improved variance reporting that captures variances in three areas:
a. Labor
b. Machine
c. Spending – isolated between production volume and spending
This will result in a tool that will identify savings as volume fluctuates. This is especially important as a means to identify inefficiencies that arise as volume declines (as well as gains made as volume increases). By raising the visibility of the impact of volatility, it enables your management team to take proactive decisions that will better manage the bottom line.
2. Process efficiencies can be both driven and monitored by the cost system. The integration point is cycle time. Standard cycle times are essential to manage the recent capital and leased equipment investments. Cost reporting gives you the capability to accomplish this. It is essential that good policies are in place regarding how standards are determined.
The proof? Here is a link to a recent client work that details how cost is an important player in process efficiency. This article documents more than USD3.3 million of rapidly achieved savings.
3. Finally, consistency across operations is achieved by having a common implementation of cost management across all of your locations. This requires in-place policies, combined with thorough audits of the process at all locations to ensure that those policies are being implemented correctly.
