Cost Accounting and Analysis in Manufacturing

Julie Ellsworth-Enman, Director of Finance at Sofina Foods

Julie Ellsworth-Enman, Director of Finance at Sofina Foods

The manufacturing environment has encountered a tremendous amount of change in recent years. Uncertainty in supply and rising input costs are causing manufacturers to have to act fast and think outside the box. Terms like “continuous improvement” and “operational excellence” are being heard more often. Regular repairs and maintenance spend just isn’t cutting it anymore and more robust preventative maintenance programs and capital expenditures are needed. These are necessary not only to improve efficiencies and reduce materials usage, but also to reduce labor requirements. We’re hearing all over Canada about labor shortages. In my experience, I am seeing manufacturers getting hit hard in the labor market. Typical manufacturing jobs are not where people want to work anymore. The days of entire families working in a production line together are dwindling. When older workers retire, there isn’t a lineup of younger people waiting at the door to take their place. The jobs aren’t glamorous, and they definitely aren’t easy. 

“Being able to analyze and trace your costs enables you to price your products accordingly and gives you a greater chance of getting a customer’s business.”

Manufacturers need to know, in real time, what their costs are in order to be able to manage them adequately. Cost accounting and cost analysis is even more important than in the past. No matter what costing method you use (standard costing, activity-based costing, etc.), cost accounting systems are key to helping you improve your company’s performance. Being able to analyze and trace your costs enables you to price your products accordingly and gives you a greater chance of getting a customer’s business. Alternatively, if you don’t accurately analyze and trace your costs, you could end up pricing your products incorrectly and eating into your margins. This is where cost accountants come into play. Cost accountants can gather all of your purchases and break them down into the important buckets like direct materials, direct labor, variable costs, and fixed costs. From there, they report and analyze those costs, which can lead to improvement of processes and efficiencies, which enable the business to reduce their production costs. An example of this could be in your maintenance costs. Maybe you are constantly repairing an old piece of equipment. When times are tough, companies can sometimes get caught up in cutting costs and only want to spend the minimum amount possible at one time. It’s easy to lose sight of the spend when it’s coming in dribs and drabs over time, so this can often quickly add up and cost you more than it would have to replace it. It's important to study spending trends and identify areas where this might be happening to ensure you’re not throwing good money after bad. You want to ensure that you are making the most profitable decision for the company long term and not just today.

I read a quote once that stuck with me. It said, “There’s a reason the rearview mirror is so small, and the windshield is so big. Where you are headed is much more important than where you’ve been”. If you want to be in business for the long haul, forecasting is a very important exercise. You need to be able to articulate where you want to go so that your teams make decisions to support that vision. Cost Accounting and analysis is not just important to explain what happened yesterday, it’s also an important part of predicting where you’re planning to end up tomorrow. Understanding your costs and identifying trends will provide you with key information to predict your costs going forward. You can use this data to create what if scenarios and determine the impact that input pricing or production volume changes can have on your business and allow you to better prepare for variability in your business. The results of these analyses will tell you whether your vision is viable or whether you will need to adjust any components of your business to be able to achieve your goals.