Creating a Production Budget for a Manufacturing Company

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If you are not an accountant, you may not be aware of the various direct and indirect costs that may be involved with a manufacturing production project. If you are an accountant, you may still be unaware. Manufacturing is complex, requires communication among all interested management parties to be successful and is increasingly cutthroat. This article shows you how to make the right decisions with proper budgeting.

History

Production managers used to just make their product. A marketing manager would try to sell the product or service. Engineers engineered. And accountants buried their noses in numbers and balance sheets and played with their abacuses. The manufacturing world has evolved, and it continues to evolve. Manufacturers must now keep an eye on global competition, increased focus on individual customer requests (personalization), the use of cross-functional teams that may span different offices, shorter product life cycles, time-based competition and information technology.

Function

Battle against the evolving elements by monitoring the success of products and services with appropriate product and process costing. Product costs can provide the following: 1) a measurement for the value of your inventory and cost of goods sold (COGS); 2) facts for production managers to use for cost control and decision making; and 3) cost data for interested outside organizations, such as government agencies or insurance companies, that may need to assess operations.

Size Matters?

Yes, it does. As a manufacturer has more sets of products and product costs, operations become more complex and accounting systems become more complex. Also, there is the challenge of delivering accurate costs in a timely manner with the increased complexity. The secret to accounting with increased growth lies in applying departmental overhead rates and activity-based costing. Applying department overhead to your individual products or services gives you a more accurate picture of the complete cost of operations. Activity-based costing goes one step further by helping you monitor inlaid activities, such as material handling, production scheduling, inspection and others.

Warning

Great, if you think using departmental overhead and activity-based costing has solved many of your production budgeting issues--not so fast. After you have set up this cost control system, don’t rely 100 percent on the technology in place to monitor. What if your system breaks down? How do you know that the facts gained from the production floor are translating appropriately to your reports? Get to know your operations and make sure that the appropriate measures are collected.

Expert Insight

After many cycles of efficient product costing, it is easy to get complacent and rely on your reports in place to monitor the value of your operations. You may find that there are intrinsic values or costs that may not be showing up in your reports. One potentially overlooked value may be the happiness and satisfaction of the employees working on the product or service. This is an intangible measure that may not show up in your reports. Also, customers may be finding intangible values in the products or services you are providing. Know what your customers like about a product or service before you decide to cut it due to cost reasons alone.

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