Adjusting Overhead Costs for Less Volatility
Rochester, New York
Client Overview
The manufacturing business was in a competitive market where a small pricing change could mean the loss of a contract to other competitors.
The Opportunity
The client was losing more bids and noticed that when costing potential jobs they seemed to be higher than the prior years by a percentage larger than management would expect. There were some questions on proper inventory movement and controls, and also on overhead allocation. The company was unsure that the costing was proper and accurate, and was having some unusual variances in their standard costing system on a monthly basis.
Costs were driven down and the company began to win more bids and had a better understanding its cost and profitability and how to better assess inventory variances going forward.
The Solution
We reviewed the overhead allocation and noticed that some calculations were adding in more overhead for jobs when the full manufacturing floor was not be utilized, rather than the portion for the particular jobs. This was driving up pricing by about $5 per item, which was causing the company to lose bids. In addition, we reviewed the accounting system inventory movement by tracing certain raw materials, WIP, and burden rates from start to finish and noticed that some of the initial setups for finished goods were improperly pulling additional direct labor due to parts being combined in assembly. This was changing the standards, and then also affecting the normal variances.
The Outcome
We worked with management to reassess the manufacturing overhead and the method of allocating the overhead to potential jobs to ensure accuracy. In addition, a sample of the inventory was tested and inventory standard entries and movement were updated to ensure proper costing by the ERP system. The head of operations and purchasing then went through the inventory database to fix any errors and then put in place additional inventory controls when adding parts, assigning standard costs, and for the assembly of multiple parts for a finished good. This drove down the cost of potential jobs, and the company began to win more bids and had a better understanding its cost and profitability and how to better assess inventory variances going forward.