Accurate Product Costing
Hello again,
This post is for small and medium-sized manufacturers that are vetting new manufacturing software systems. We hope you find it useful.
We speak with a lot of different manufacturing companies all over the country that feel their profits should be higher than they are.
Many of them run on outdated software or cobbled together systems, manually tracking with spreadsheets. They often encounter a lack of meaningful visibility of some key aspects of their operations. Profitability, or at least cost, tends to be one of those.
PBS™ Manufacturing ERP helps transform your cost management with easy-to-use tools and reports that provide real-time visibility into actual product costs, rather than having to wait for financial reports.
Underperforming Products
If you measure performance by looking at your general ledger monthly, quarterly or yearly, you’re too late and hurting yourself as an organization.
The general ledger primarily reflects historical data, but manufacturers need real-time insights to make timely decisions, adapt to changing market conditions, and optimize operations.
Do you include labor and burden into your costs? Many manufacturers don’t, or they “guesstimate” and aren’t rooted in reality.
Do you know which products are overperforming and which ones are underperforming? If you’re not using an effective manufacturing system to manage your costs, the answer is likely no.
The “80/20 rule” generally applies with manufacturing product performance. It’s likely that about 20% of your products underperform. And, another 20% overperform, so they balance each other out.
You’ll see that the general ledger indicates you’re doing fine and hitting the margins you expect to hit.
What if you could identify those underperforming items?
This allows you to increase profitability by restructuring pricing to get margins on track. You may need to drop products that are literally costing you money to sell or find better ways to make them.
Leave the overperforming products alone and let all the average ones stay where they’re at while monitoring them. By bringing the bottom 20% into the profitability range, you increase your overall profitability as an organization.
Cost Picture
PBS™ Manufacturing ERP helps you gain a far better understanding of your product costs. This breakdown consists of the total material, labor, and processing costs.
This includes all the raw materials, purchased items, that you use to make something. Plus, any outside processing costs – perhaps you send something out for heat treating or anodizing etc.
PBS™ tracks costs on a job-by-job basis. It gives you the ability to see how much items really cost to produce on a particular job versus what you thought it should cost you.
In fact, sometimes the labor and burden will far exceed the overall cost of material that goes into producing something. If you do not have all aspects of your cost built in, the cost picture will be inaccurate.
With PBS™ Manufacturing, you use the item master database to define how you make your products. This is accomplished through the creation of bills of materials, work centers, and routings.
A work center is a designated area where specific tasks are performed. It includes machines or people that perform a particular step in a manufacturing process.
Each of your production steps, or routing operations, have time associated with them and are linked to a work center. Every work center has its own cost basis – a standard labor cost and a standard burden cost for the work center.
This information can then be used to actually impose load, or book time, against your work centers. It allows you to build product costs and schedule production against the work centers on the shop floor.
A cost roll-up calculates all of the cost picture in the item master. It takes the information in the bill of materials, plus routings to get the labor and burden, and draws them into the item master to calculate overall costs.
PBS Manufacturing
Many manufactures are getting by on a distribution system, or basic inventory system, and don’t have the ability to procure a total cost picture.
When new PBS customers create their first bill, build out work centers and routings, and roll up their costs, they are often surprised. Their response is often, “Oh, no. Really? That’s what it costs me to make this?”
Very often folks don’t pay attention until too late in the process, and they get can caught in a position where they are in financial trouble, and they really don’t know why.
Now they can set the price accordingly to ensure they are making a reasonable margin on products. This could mean outsourcing a process because you can’t do it efficiently in house.
It’s critical to have the infrastructure – the bill of materials, the work centers, and the routings in order to be able to establish an accurate cost picture.
PBS™ Manufacturing gives you the ability to track costs in real-time. Not only material costs, but also labor, subcontractor costs, overhead and burden.
You can build an accurate cost picture before you ever even start making something. And, you can refine your quoting systems to a point where they are more accurate.
Accurate manufacturing job costing allows you to effectively track how much it’s actually costing to make things. You can then adjust operational processes and pricing to improve profitability.
Call 800-969-7900 to learn more about PBS Manufacturing ERP, an affordable yet robust system designed to serve the needs of small to mid-sized manufacturers. Or, contact us – we are here to help.