Benefits of Actual Costing for Manufacturers

Part 4 of a 5-Part Series.  Read Part 1, Part 2, Part 3, Part 5.

Standard versus actual costing is an important decision point for manufacturers.  Synergy Resources’ Patricia ‘Pat’ Bumbaca, Katie Farrand and Jack Hughes share their insights on the issue to help manufacturers choose what may be best for their individual businesses.

Q: Are there specific types of companies who can benefit from using actual costing?

Pat: Since the main benefit is gaining access to real-time analysis, actual costing is well-suited for transaction-oriented. For these kinds of businesses, the ability to analyze jobs and their associated costs in real-time, on a job by job basis, is very beneficial.

Q: Are there benefits for government contractors such as aerospace and defense?

Pat: If you’re a government contractor, you have to use actual cost – essentially, not absolutely. When you sell to the government, you have to prove that you did indeed buy and sell at the prices you had promised. You have to be able to say, ‘I can show you that I made this purchase for these materials on such and such a date.  I paid the exact price that I had promised when I ordered the materials, too.’ So for government contracts, actual cost is essential!

Q: What are the benefits of actual costing for analysis?

Pat: The main benefit is that your data is available in real-time. You’re getting answers about what’s going on right away. You’re not waiting for numbers to fallout into your income statement and then wonder, ‘What happened to my variance bucket?’ Actual cost is real-time and it gives you real-time analysis, so you’ll know right away while you’re transacting. Actual costing may or may not confirm your hunch: ‘I thought this was happening!’ 

Q: Does actual costing sometimes reveal that a manufacturer might be selling at a loss?

Pat: Sometimes they’re manufacturing a product as a loss leader, so it’s usually a conscious decision. Maybe they’re doing business with a large corporation. The manufacturer might take up a loss on one part to make a profit on the rest of the parts in the batch that’s been awarded to them.

Q: Have you witnessed any ‘a-ha!’ moments when the manufacturer’s basic assumptions have been challenged due to implementing actual cost?

Jack:  Yes! When you run the Gross Profit report, you’re looking at standard versus what it actually cost. The customer might be looking at that report and seeing the different costs for material and labor. All of a sudden they realize: they’re losing money on some jobs!  Of course, sometimes the manufacturer has made that kind of conscious decision on a loss leader and plans to make it up on the other jobs.

In other cases, our customers were truly surprised – and not in a good way.  Some have said, ‘Whoa!  We knew that we were doing ok in total, but we didn’t know that this product line stunk so bad. It’s not strategic that we keep it, so let’s increase the price. If we lose a few orders, that’s ok.’ 

Actual costing can definitely help manufacturers get into that strategic mode of thinking because they have better information available to them.

Q: Who else benefits from having greater access to information?

Pat:  You can take that a step further. One of the benefits is you’re getting real-time information to decision makers in every department throughout the company. This is important for ISO standards. The manufacturer is expected to facilitate a culture of participative decision making.  Actual costing makes it easier to explain, ‘Just go look at this job and you’ll see exactly what’s going on’. Actual costing can be empowering!

Q: Can you talk more about using actual costing to enhance the participatory culture?

Pat: The introduction of ISO Quality Management System standards got manufacturers talking about flipping the organization chart upside down and encouraging everybody to participate. Workers at the production level are encouraged to find their voices. As opposed to being dictated from the top, ISO has turned it upside down. Actual costing is an important part of the total ISO solution. Employees need the information to do their jobs and make informed decisions.

About the Experts

• Patricia ‘Pat’ Bumbaca has worked for Synergy Resources since 1999. Pat specializes in financials and accounting process improvements.
• Katie Farrand has worked in the Continuous Improvement group at Synergy Resources for the past six years. Katie specializes in helping customers improve business performance through the implementation of process improvement strategies.
• Jack Hughes is a CPA who joined Synergy Resources in 1998. Jack specializes in financial software applications and business process consulting.