Building Value Through Excellence in Cost Accounting
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Bart Bedard presented on building value through excellence in cost accounting. He discussed key aspects of cost accounting including standard costing, variances, and different types of costs. He emphasized the importance of understanding how accurate cost accounting can benefit profits, sales, and production. Bart also outlined four keys to excellence: having the right staff with the right attitudes; ensuring the right setup of bills of materials, overhead rates, and cost allocations; and maintaining variance vigilance to identify issues. He provided examples to illustrate concepts like overhead allocation and calculating direct overhead rates.
Building Value Through Excellence in Cost Accounting
- 1. Building Value Through Excellence in Cost Accounting Presented by: Bart Bedard OC IMA Dinner Meeting March 19, 2014
- 2. Bart Bedard – Last 27 years in mid-level to senior management accounting and finance positions at manufacturing companies BS in Accounting from BYU, MBA from CSUF, CPA, CMA About the speaker
- 3. Profits
- 4. Cost Accounting • Standard Costing • Discrete vs. Process • Job/ Project Costing • Service vs. Mfg. • Average Costing • Actual Costing • Labor • Material • Overhead • Tracked • Not Tracked Variances Every company has their own way
- 5. Survey • How many of you work for a manufacturing or service company?
- 6. Survey Of those that work for a manufacturing or service company: 1. The cost & gross margins reported are excellent 2. The cost & gross margins reported are adequate but could be improved. 3. The cost & gross margins reported are inadequate and cannot be trusted.
- 7. Bart’s Four Keys to Excellence in Cost Accounting 1.Understanding the Power 2.Right Staff 3.Right Setup 4.Variance Vigilance
- 8. Understanding the Power (of accurate costing) •Accurate quantities on hand
- 9. Understanding the Power (of accurate costing) •Accurate standard costs • Standard costs as close as possible to actual
- 10. Understanding the Power (of accurate costing) • Accurate standard costs • Benefits to Sales
- 11. Understanding the Power (of accurate costing) •Accurate standard costs • Benefits to Production
- 12. Understanding the Power Gross Margins improved 10% over 6 years (i.e. millions of dollars a year in profit improvement) Profits
- 13. Right Staff • Jim Collins author of Good to Great – “Get the right people on the bus” • Most important • Attitude & Aptitude** • Experience
- 14. Right Setup •Bills of Material & Routers •Overhead rates
- 15. Right Setup Bills of Material & Routers Commitment & Dedication
- 16. Right Setup Continued Overheads Allocations & Cost Pools Allocated Individual Department Direct rates Part of General Mfg. Overhead Rate Part of SG&A rate Direct Molding YES CNC Plastics YES CNC Metal YES CNC Swiss YES Automation YES Assembly YES Indirect Machining YES YES Tooling YES YES Quality Control YES YES Quality Assurance YES Document Control YES Facilities YES YES General Manufacturing YES Production Control YES Inventory Control YES SG&A Corporate YES Finance & Accounting YES YES Human Resources YES YES Information Technology YES YES Sales & Marketing YES R&D YES
- 17. Right Setup Continued Any cost that can be reasonably allocated SHOULD BE allocated. Allocate based on: 1. Headcount 2.Square feet occupied 3.Number ERP software users 4.Number of purchase orders processed 5.Etc.
- 18. Right Setup Continued Any cost that can be reasonably allocated SHOULD BE allocated. Costs that should be allocated to benefiting departments: • Payroll taxes, Vacation, Sick pay, 401k matching • Medical, Workers’ Comp. Liability and other insurances • Rent, Utilities • Etc.
- 19. Employee CNC Swiss Maching Other Total Mary 20% 40% 40% 100% Joe 10% 80% 10% 100% Jane 15% 35% 50% 100% John 80% 15% 5% 100% Larry 20% 20% 60% 100% Gary 30% 30% 40% 100% Parker 40% 40% 20% 100% Average 31% 37% 32% 100% This example assumes all employees make about the same amount. Tooling Department Allocation
- 20. Total Overhead after allocations Total Labor Productive Labor Percent Productive Labor Overhead less Productive Labor Direct Overhead rate Direct Molding 100,000 40,000 80% 32,000 68,000 213% CNC Plastics 150,000 60,000 85% 51,000 99,000 194% CNC Metal 200,000 80,000 78% 62,400 137,600 221% CNC Swiss 75,000 30,000 88% 26,400 48,600 184% Automation 300,000 120,000 75% 90,000 210,000 233% Assembly 225,000 150,000 82% 123,000 102,000 83% Calculation of Direct Overhead Rates
- 21. How often should standards be updated? Given: Standard costs should be as close as possible to actuals. • Annual? • Quarterly? • Monthly?
- 22. Capitalizing Variances Variances are capitalized equal to the amount of variances incurred over the time it takes to turn inventory 1 time. E.g. 30 days.
- 23. Variance Vigilance 1.Errors 2.Labor Efficiency 3.Labor Absorption 4.Material Usage 5.Purchase Price Variances 6.Overhead Absorption 7.Follow up with Sales, Production & Engineering
- 24. Direct Departments Total Overhead after allocations Absorption Over (under) absorbed % Over (under) absorbed Molding 100,000 90,000 (10,000) -10% CNC Plastics 150,000 160,000 10,000 7% CNC Metal 200,000 225,000 25,000 13% CNC Swiss 75,000 100,000 25,000 33% Automation 300,000 120,000 (180,000) -60% Assembly 225,000 150,000 (75,000) -33%
Editor's Notes
- #5: This presentation will focus on standard cost accounting
- #9: STORY: Cant do it. What we did. MRP ordering accuracy, JIT, reduce shop floor shortages and overages, reduce inventory levels and therefore working capital requirements and therefore borrowing, eliminate YE physical – all told saving $100,000’s
- #10: Accurate bills of material, routers, overhead rates etc
- #11: iQ4bis, pull IT development – see sales, costs & GM by customer, sales rep, low margin or losses, drop sales or increase prices, high margins – lower prices to be more competitive, retain loss due to many other profitable lines with customer…
- #12: ID inefficiencies and improve processes – posted efficiencies by various work centers and departments on walls -
- #14: Story about employee – 20 years old, no 4 year degree (yet) but I could tell in the interview he had the aptitude and attitude. Over the next few years he got his bachelors degree in accounting going to night school and became an expert in JD Edwards and went to work as a consulting – probably tripling his salary over the 5 or 6 years since he started working for me.
- #16: Computer systems require you to feed the hungry monster
- #17: Many companies do not go to this effort – if it works for them then fine – but if the company really desires the most accurate costing then all these allocations are necessary. And it extends the close. First you have close AR, AP and enter all accrurals and misc. JE’s. Then you start allocations and you may have layers where you make one allocation then re add all the departments and then make another allocation.
- #24: Errors: router times, bomUoM, quantity per, yields scrap rates,