Revising a Manufacturer’s Product Costing System
Written by Lori Jansen
Client Overview
The Manufacturer is a family-owned, owner-operated company that has experienced significant growth over the last 15 years. The Manufacturer operates in a fast-changing, highly competitive industry, manufacturing and selling parts to the after-market automobile industry.
The Opportunity
The Manufacturer was experiencing poor operating results which were restricting the company’s access to financing. They engaged Kreischer Miller to provide consulting and advisory services addressing the key issues impacting the company’s overall profitability, with a focus on the following:
- Assessing existing financial systems and processes to determine the level of accuracy and controls over the information and the quality of the output as a basis to make decisions.
- Reviewing inventory controls and costing to determine the level of accuracy and ensure that the company understood and accounted for the fully absorbed costs of its products.
- Reviewing the company’s product and customer mix related to its costs to determine the profitability of different segments of the company based on product or customer type.
“We recalculated overheads by updating departmental expenses and changing basis of allocation to products to better reflect actual utilization and absorption of costs.”
The Solution
The lack of an integrated product costing system was a main cause of the Manufacturer’s problems. Misinformation generated by the costing system caused the company to execute a fundamentally flawed pricing and product strategy. There was no “one size fits all” answer to the problem. Instead, the solution was addressed in two stages—short-term and long-term.
In the short-term, the focus was on improving product costing and overall profitability. We recalculated overheads by updating departmental expenses and changing basis of allocation to products to better reflect actual utilization and absorption of costs. We also evaluated product profitability by segment and developed an action list of profitability improvement initiatives.
The long-term stage of the solution was focused on creating an integrated product costing system. We evaluated the implementation of a new, fully-integrated accounting and management information system that would be appropriate for a manufacturing company of this size. We also performed a thorough needs and requirement study as a basis to evaluate and compare various systems and platforms.
The Outcome
As a result of the engagement, the Manufacturer realized several positive outcomes. First, the increased focus on the key product margins resulted in improved overall company profitability. Additionally, implementing a more standardized pricing template has helped eliminate multiple formats and errors in quotes to prospective customers. Plus, working with manufacturing personnel resulted in a more team-oriented approach toward improving profitability and creating a better understanding of the importance of controlling costs. Finally, the Manufacturer selected a new integrated system that will meet its needs as it continues to grow.