How to Refine a Costing System
A costing system enables estimating costs, collecting actual costs and analysis of variances. Accounting departments use bills of material to perform cost roll ups. Bills of material are statements of which parts are required to make parts and can be several levels deep depending on the complexity of the manufacturing process. The roll up results in standard costs for each part used for estimating purposes. Refinement occurs in several ways. First, the variances are analyzed, process improvements made and standard costs are altered. Refinement also occurs by changing what the system tracks. For example, in manufacturing environments a typical error is to track too many manufacturing operations. The costing system enables tracking every activity but also requires data to be input, which may be excessive. Once variances are controlled, refinement through reduction of tracked activities simplifies data input processes.
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Instructions
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Develop standard hours for manufacturing processes in terms of labor and machine hours. Develop dollar rates per hour for each of the work centers used on the operations. Create purchased costs using purchase history and averaging them to create a standard cost per purchased part.
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Create standard operations using manufacturing resource planning software for the manufactured parts. Run the MRP cost program to roll up costs for purchased and manufactured items using bills of material and operation detail in the MRP system.
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Release purchase orders and work orders. Track start and completion of operations and the actual hours charged for labor and machinery. The MRP software will create actual dollar costs using the actual hours and the labor and machine rates. Receive purchased parts and input the actual cost of purchasing parts.
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Run the costing system variance reports. These reports will compare standard costs to actual costs and define variances. Analyze the variances and develop the reasons for the variances. Make necessary changes to the manufacturing processes and purchasing processes to reduce the variances. For example, use a higher quality vendor for purchased items or improve manufacturing processes by redesigning operators' tasks or introduce new equipment.
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Analyze manufacturing operations with no, or small, variances and consider eliminating actual hour tracking for those operations. This simplifies data input on the manufacturing floor cutting down on data input errors, which can be a cause of variances.
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