Manufacturing

Manufacturing

 

Manufacturing businesses are concerned with the same TCO issues as are service and retail firms. In addition, they procure direct materials and incur overhead in the production of their finished goods inventory and other activities required conducting business. Managerial accountants place emphasis on the variance between what something should cost or is expected to cost and what it actually costs. Price variance analyses are often misleading. For example, a favorable price variance may indicate that although the material was less expensive, it was of a lower quality and therefore more was used. If you compare this with an unfavorable labor efficiency variance, it becomes clear that a lower acquisition price may translate into higher production costs. By considering all costs simultaneously, supply management professionals and other members of the product development team can better determine the right specifications for the material and ensure that suppliers meet those guidelines.

 

The accurate allocation of manufacturing overhead is a major factor in calculating the true unit cost of a product. Using the wrong cost driver can make a product seem more or less expensive than it actually is. Activity based costing (ABC), although initially somewhat complicated and expensive to implement, can return long-run benefits by providing more accurate unit cost information that serves as the basis for better decisions. Careful budgeting and procurement of overhead items from the purchase of capital equipment to that of lubricants used in production and the implementation of systems to ensure the timely availability of accurate information are methods used in obtaining the lowest total cost of production.