Why is accurate costing essential for manufacturing?

* By Rodney Repullo

The correct (accurate) cost is one of the crucial processes for manufacturing companies because it allows them to properly define the selling price of a product, analyze profit margins, determine the ideal mix of products for production and decide whether it is best to manufacture in-house or purchase certain items from other suppliers.

Finding the right answers to these questions often determines an industry's success or failure. The correct cost is also the basis for production control and monitoring. By measuring the actual cost of each product or service order against the expected cost, it is possible to immediately identify deviations in production and resolve them before they have a devastating effect on profitability.

One of the most common mistakes that lead to inaccurate costs is the difficulty in measurement. Often, the cost of the product depends entirely on standard estimates for the processes involved, without considering the actual downtime of the machine, the variable yields of each product and the actual energy consumed to produce it.

Why are 80% from manufacturers making a mistake in costs?

Success in defining the cost of a product depends mainly on the following two components:

- Direct costs;
- Indirect costs.

Indirect costs (or overheads), such as rent, are relatively fixed and, therefore, can be estimated quite easily. Basically, it is possible to know a year in advance - or more - how much you will spend on rent. This is not going to change unexpectedly.

Direct costs, however, have more impact and are not so easy to measure. They include labor costs, materials, energy and machine hours used for each finished product. They can vary widely and, as manufacturers know, are affected by unexpected events, such as machine failure, variation in yield or changes in raw material costs. It is difficult to accurately measure direct costs due to difficulties in accessing data, such as energy consumption per hour. As a result, very often, manufacturers must settle for estimates and hope for the best.

Improving Costing

Clearly, manufacturers need greater precision in measuring direct costs and making data available to managers and other decision makers. To give just a few examples: real machine hours together with non-labor costs (not related to wages and benefits) of operating each machine (fuel, repair parts, etc.), labor costs per shift, including overtime, labor costs material and scrap. This data must be compiled and presented to management, along with relevant prior estimates, so that they can quickly see whether costs are being contained or not.

With the advent of technology that drives all of Industry 4.0, the cost of detecting this data through sensors and other devices added to legacy equipment has decreased, making it possible to gather accurate 100% costs and other KPI data, rather than deciding on estimates. . The use of data for decision making can be implemented gradually, starting with specific production lines and expanding onwards, to other areas of the shop floor.

The benefits of real-time cost control

By working at a steady pace, companies will see the benefits of providing accurate cost data to their decision makers. Detailed cost data, analyzed and presented through research panels that immediately support deployment decisions, allow manufacturers to see the profitability of each product, customer, job and also the cost versus the sales price.

With this data in hand, decision makers also gain the following advantages:

- Optimization of the supplier and evaluation of its quality, using real data on quality and cost to produce with its raw materials;
- Decisions about manufacturing or buying - is it worth producing a certain part or product, or buying it from an external supplier ?;
- Ability to make decisions for pennies based on data and changing market conditions.

Today, as profits are rigorously scrutinized, it is imperative that business managers not only have all relevant information at their fingertips, but that they can be triggered, using the same platform that gathers and processes them. The result is a better-functioning and more profitable business, in which all employees can replace trivial and error-prone tasks in data collection with more rewarding actions that improve their results.

* Rodney Repullo, CEO of Magic Software Brasil.

Notice: The opinion presented in this article is the responsibility of its author and not of ABES - Brazilian Association of Software Companies