Untimely Traditional Cost Concept

Under the influence of market transformation (Small and diverse, highly customized) , “high quality, short delivery time and low cost” is clearly the standard condition for the market competition. Although the company has been actively betting equipment to optimize production technology and product quality. However, as one of the necessary conditions for survival in industrial competition, corporate costs are still not valued by enterprises. Even many listed companies still cannot calculate the cost accurately. They only estimate 80% of the price directly as the price cost, which may cause the manager director to lose money and still doesn’t realize it.

The Cost Structure of The Manufacturing Industry

Even if we increase the sales of products, if the costs are uncontrolled, and without knowing the exact cost, we will end up wasting a lot of efforts. We only can calculate the sales profit by clarifying the current inventory value and the cost of the goods sold. Perhaps by increasing the price or making economic production batches, etc.. there is an opportunity to reduce the company’s hidden costs, and then help the company to improve efficiency and competitiveness!

Companies often need to divide costs into standard and actual costs:
[Standard Cost] Easily calculate product costs or use as a tool for management control, easy to plan and improve.
[Actual Cost] Used to reflect the actual situation of the production order and compare it with the standard cost to settle the difference in cost.

 


The cost of manufacturing is generally composed of material cost, labor cost, overhead, and processing fees. (As shown on picture)

[Material Cost]
(Standard) List out the direct & indirect materials’ requirements in BOM * standard unit cost
(Actual) Actual used materials & semi-finished goods qty. * moving weighted average cost

[Labor Cost]
(Standard) List out the production process rational human hours * standard wages per hour
(Actual) Actual human hours took * total labor cost in financial report / total working hours

[Overhead]
(Standard) List out the production process rational machine hours * standard overhead rate
(Actual) Actual machine hours took * total overhead in financial report / total machine hours

[Processing Fee]
(Standard) List out the production subcon. process unit processing fee
(Actual) Actual subcon. process unit processing fee

*The disadvantage of standard cost management is that it can’t change elastically. Such as the price of raw materials in the metal industry fluctuates greatly, and the accuracy rate of manufacturing cost calculated by standard material cost is very low. In the case of the mass production model, it’s easy to ignore the cost of bulk purchase/mass production reduction and lead to higher machine maintenance costs. *

Conflicts Between Operational Targets & Departments

For example, the factory manager is requested to reduce production costs. On the basis of none cost analysis information, the most direct and quick way is to reduce the manpower, but the counter effect is often efficiency becomes lower, in order to deliver goods on time, they need to work overtime to finish production, so the cost increases rather than reduced!

When companies realize that they need to collect both actual and standard cost data, companies can compare cost variances and make optimal response decisions through the actual operational data collected, provided that we must be able to effectively achieve the cost traceability and accurate analysis of cost content, there are the ways to achieve real cost reduction and efficiency improvement.

Three Stages of Cost Management

Although the basis of cost-analytical information enables enterprises to make more informed decisions, however, the transparency of decision-making information may still need to go through three stages: Manual Accounting & Computerization > Accounting Connection Front-End Invoices > Modules Integration Information Concatenation.

[Manual Accounting & Computerization]

On the early stage, accountant need to collect each department transaction voucher and notes first, then record into computer, but the efficiency is low and complicated, when data not matched, we need to adjust the account as well. All these flexible management on the account not only unable to provide effective management information, but also unable to fulfill the auditing standard.

[Accounting Connection Front-End Invoices]

In essence, it is not much different from the first stage, but it starts to allow the recording of information other than accounts code, amounts or summaries. It can connect the front end process through the remarks in the voucher from the front end, or generate the voucher from the system directly. Remarks fields help the system to aggregate into simple reports by condition. However, such data processing is still limited inside the framework of accounting, and still unable to provide neutral and multi-layered information, or provide much useful management information to support the decision-making process.

 [Modules Integration Information Concatenation]

Nowadays, the accounting system has been developed into an ERP module integration management system. ERP not only integrates the efforts of various departments, but also incorporates the concept of internal control, so that accounting statements are automatically aggregated and generated. The accountant also change their roles from the accountant to the company internal audit staff to confirm each process done in the right way, to assist the company making effective cash flow configuration and cost information analysis.


The cost and financial report data is originally from the front-end job, directly let the front-end job feedback to the system, and then through the system settings, let the system assist the debit and credit account records, directly summarize and generate financial reports, isn’t such management more efficient and transparent? (As shown on picture)

The System Makes Cost Data More Valuable

Based on the above simple sharing, whether it is operating cost or manufacturing cost, it should be recorded in each process. And the ERP system has an integrated management mindset, it can also be traced back to the cost information. Only through collecting the actual data, enterprises will not make decisions with past experiences, and they won’t need to pay for the competition of grabbing order!