By Robert Belcher, CPA
WHY IS AN ACCURATE COST ACCOUNTING SYSTEM SO IMPORTANT?
One of the biggest challenges facing manufacturing companies today is controlling costs. With energy costs rising and commodity prices getting higher manufacturing companies are under increasing pressure to find ways to become more efficient. Manufacturing companies have to be focused on cost and competitiveness and using their resources in the most productive way possible.
For manufacturing companies to manage their costs they have to be able to understand and analyze these costs. An accurate cost accounting system that provides reliable and relevant information can be used to make decisions which have a direct and immediate impact on a company's bottom line. With a correctly implemented cost accounting system management will have information to improve performance and production efficiencies by detecting deviations from standards, thereby reducing waste. Cost accounting can also provide information to management about whether a company is utilizing its resources effectively.
A practical consideration of implementing a cost accounting system is that the benefits must exceed the investment. Additionally, maintaining a cost accounting system can be a complex and time consuming process. Every company is different, and a common cost accounting system cannot be designed to fit every business. The system will depend on the nature of the business and the product manufactured and must suit the operations of the company.
In many instances, companies do not have confidence in the cost information provided by their system. A review of a company’s cost accounting system can help analyze the costs associated with the production process. This process will help verify the basic components of the production process such as material consumption, labor cost and overhead, and determine that these costs have been captured and reported in accordance with generally accepted accounting principles.
An analysis and review of the cost accounting process would typically include the following:
- Cost accounting methodology
- Cost data by process, department or product
- Overhead allocation and standard cost calculations
- Reporting methodology to management
- Internal controls over inventory and purchasing
A review of a company’s cost accounting system could help identify whether the system is providing management with timely and meaningful data to enable them to identify operating efficiencies and problems.
- An effective standard cost accounting system would provide the following information:
- Material price variances from expected targets (standards) to measure the effectiveness of the purchasing function
- Labor, overhead and material usage variances to measure the effectiveness of the production function
- Accurate information to determine product profitability and pricing strategies
- Provide a basis for isolating physical inventory shrinkage or overages
A review of a company’s cost accounting system could also help identify the benefits derived from the present standard cost accounting system, evaluate whether the system is meeting the needs of the company and determine if changes such as the following should be implemented:
- Establishment of new material standard costs based on current and expected purchasing activity
- Adoption of revised or new variance reporting procedures
- Establishment of procedures to periodically review reported variances and follow up on unusual fluctuations
- Procedures for use of standard costs for customer quoting purposes and periodic comparisons of actual and standard selling prices
- Establishment of procedures to periodically review the accuracy of the standard costs
Decosimo’s professionals have a diverse knowledge of many different systems and the capability to evaluate the risks specific to unique needs and provide appropriate solutions. We have worked with many manufacturing companies and cost accounting systems and understand the nature of a cost accounting system for a particular company.
CONTACT OUR MANUFACTURING LEADERSHIP TEAM
If you need a customized cost accounting solution specific to your organization’s needs, contact Decosimo's manufacturing leadership team and ask us how we can help you evaluate the issues and risks specific to your company and assist with creating an appropriate solution.
Decosimo serves a wide range of privately and publicly held clients in many sectors of manufacturing and distribution – from the makers of Little Debbie® Snacks and the world’s largest manufacturer of towing equipment to Olan Mills Portrait Studios, Hardwick Clothes, Tandus Floorcoverings and Beaulieu Carpets. We’re the CPA of choice for more than 100 manufacturing clients with combined annual revenues of more than $4 billion. Our breadth of services and depth of expertise currently benefit manufacturing and distribution clients in transportation, industrial equipment, apparel, floorcoverings, furniture, metal fabrication, chemicals, food and beverage, healthcare and packaging to name a few.