manufacturing cost accounting

manufacturing cost accounting

Optimizing Manufacturing Cost Accounting: Strategies for Efficiency and Profitability

1. Introduction to Manufacturing Cost Accounting

As with systems in other areas, manufacturing cost accounting has been unable to keep abreast of the pace of development in changing environments. Throughout this drawing process, the practice encountered the differences between service and manufacturing environments: the structure and degree of drawing process are actually first caused by cost distortion differences. Consequently, detailed reports and cost allocations are contained within an individual section which considers setup times to be a cost driver, a revenue allocation method to accommodate customer-related cost, and costing of finished goods when long production runs are made prior to formal journal entries. These problems and structural limitations highlight the weaknesses in today’s practice of manufacturing cost accounting. Recognizing this, the researcher began designing a department of manufacturing cost accounting specifically for the characteristics of a high variety, low-volume production system. This draft required a new structural framework to be successful and a technique which used the internal value of the accounting object.

Today’s businesses are increasingly challenged by their own ability to effectively and efficiently manage manufacturing costs. The cost information system is the basis for manufacturing management. Providing cost information for different types of decision making is the main purpose of cost accounting; all other aspects, such as planning, control, and performance valuation, are secondary. Formal organizations, either in their manufacturing industries or service sectors, employ cost accounting in a manner designed to assist technical and managerial staff in performing their proper functions, providing, where necessary, inherent pattern flexibility. The underlying assumption is that variation of cost is caused by differences in the activity level and/or the way the product is made. Traditional or practical manufacturing cost accounting, therefore, was easily employed.

2. Key Concepts and Principles in Manufacturing Cost Accounting

It is the rich set of strategies rooted in this concern of cost accounting that remains the major focus of our research. Manufacturing cost accounting has two primary data repositories. The first of these, the direct accounting or job cost ledger, attempts to answer the question of how a company’s money is being spent. It addresses this issue by dividing the total cost of manufacturing into various subdivisions associated with different manufacturing tasks. Each of these subfunctions, or costs, is tracked through the company’s information systems and eventually incorporated into cost summaries that accompany the delivery of manufactured goods to customers. Taking the long view, aggregating costs in this disaggregated accounting form enables managers to develop extensive records of past performance that are very valuable for budgeting and projecting future objectives. In the short view, such records will help executives efficiently monitor the operations of the manufacturing department.

It is impossible to derive valuable insights from the mass of data created by any manufacturing process without ensuring that information is both properly organized and accurately categorized. While the advent of diverse universal communications standards enabled the development of enormous amounts of new data, it has recently become clear that this hasn’t necessarily yielded a corresponding expansion of the conventional metric that corporate accounting departments use in manufacturing: namely, the costs associated with creating and processing that data in financial reporting. Since manufacturing output innumerable physical goods, comprises all the distillation and refinement processes that turn raw materials into finished products, and oversees a wide array of different activities ranging from machine operation to logistics, it is not surprising that manufacturing also requires an inventory of custom cost management techniques to guide analysis and decision-making about all various issues we have highlighted.

3. Tools and Techniques for Effective Cost Tracking and Analysis

For instance, lower costs may mean an enterprise can sell at lower prices than competitors or achieve higher profits. In another instance, benefits from consolidating activities from two or more enterprises at one corporate center evolve.

There are many different methods and procedures available to account and track production costs. These costs are grouped, classified, and properly allocated in financial statements, and utilized for decision-making. Some of these costing methods, tracking tools, and analytic techniques are more or less suitable to use for different businesses according to their peculiarities. For example, their manufacturing processes, the types and volumes of their manufacturing operations, the nature of their products, business and regulatory environments, and others.

This section provides an overview of the most salient cost tracking and analysis tools used in modern companies. Discussed tools include various costing techniques, performance metrics, as well as state-of-the-art information technology solutions, such as modern enterprise resource planning systems and business intelligence tools. The adoption of information technology applications in the area of cost accounting is a critical strategic decision for many businesses in an increasingly globalized, competitive, and demanding market.

4. Strategies for Cost Reduction and Efficiency Improvement

Innovation of new products and cost reductions of mature products are just two influences on the organizational culture which contribute to sustainable global leadership. These influences can often be separated by groupings of higher paid technologists and lower paid labor people. The mixture in the same plant of labor versus technical has, for example, been influenced by ceramists during different periods in aluminum and polysilicon reduction facilities. The most easily adjusted method of handling these rapid technology change, high-labor content products require separate facilities. This achieves needed simplicity and flexibility for the most profitable business strategy. Executives prefer managing one business entity. However, it is the worst place to be if no advancement has been made in manufacturing. Many new business godfathers have been corporate strategic planning executives.

For manufacturers and cost accountants, understanding the full manufacturing process is key to reducing costs. It may be the highest value-added business process in the value chain. Too often, companies don’t understand this process and only concentrate on cost accounting with a focus on the piece. This is where conservative accounting provides the green eyeshade. This chapter provides an understanding of the full manufacturing process. In summary, it requires brain power not more muscle power, thus higher productivity. You cannot cost reduce people which are typically 60-80% of all manufacturing costs. In addition to section “Innovation maturity”, this section outlines best practices and importance of the organization’s culture as used to coordinate the innovation and manufacturing processes.

5. Case Studies and Best Practices in Manufacturing Cost Accounting

Case Study 5: Manufacture Cost Accounting Information and Decision-making Inner Power Capabilities: Varied and flexible specific vendor, material, and manufacturing cost assignment and analysis for maximum cost control Benefits: Cost and variance control and increased stockholder value through enhanced return on human, manufacturing, and financial resources

Case Study 4: Support Creative Strategic Product Management Capabilities: Total product life cycle analysis and customer satisfaction relationship processes Benefits: Balanced product portfolio supporting intrinsic value-added manufacturing

Case Study 3: Customer Value Innovative Product Price Optimization Capabilities: Product price index ratios and process effectiveness ratios Benefits: Customer value optimal price realization cash flow, sales, and profit

Case Study 2: Global Product Profitability Impact Capability: Global intercompany transactions financial management options Benefit: Lower cost and risk expedited profitable value chain results

Case Study 1: Manufacturing Customer and Product Cost Analysis Capability: Capacity profit contribution analysis Benefit: Customer and product profitability from process effectiveness ratios

The following case studies and best practices address the operational improvements available from contemporary cost accounting, financial management, and financial reporting. Each case study illustrates proven cost optimization strategies and practices for more informed strategic and operational decision-making. Cost-optimal and financially-optimized manufacturing cost accounting adds exceptional value within nationwide and global product-value chain network operations.