Manufacturing (part of cost) #accounting has been designed to let production managers, planners, operations and financial controllers know what went well or wrong in their production #processes. It shows them where the value-added processes delivered against expected performance and where there are further opportunities for maximizing #efficiency. It is a systematic tool that can be refined and once understood can be expanded far beyond the example below (see picture).
The main advantage it has is that this concept allocates the #overhead by using cost drivers into different measurable sections, also known as variances. These variances result from differences between standard and actual cost and can pinpoint where the over or under-spend occurred, even sometimes down to machine level. A manufacturing location can have cost drivers defined at a plant level but more sophisticated manufacturing sites have either activity based costing or multiple overhead rates at their key production points.
In summary having a robust and refined #manufacturing accounting process has the following benefits:
- Helps maximize the efficiency of your workforce, production lines or plant
- Overhead is allocated based on #cost-drivers allowing for a fair allocation t
- Offers insights in your capacity model
- Allows you to compare to a baseline (standard costing)
- Basis for #decision making
- Focuses on added-value processes (waste reduction)
Main condition is that you have a good management/cost accounting system that allows you to track these activities and an engaged management team that drives performance on variances.
We will devote some more time on the different variances that can occur in a production process and how this can link with Activity Based Costing but for now this should give you a high level tool to understand the basics of manufacturing accounting (again you can make it more complex by expanding your #overhead allocation to any cell on your production floor):
Work in Progress (Balance Sheet) Debit Credit Standard Material Cost x Actual Material Used Standard Material Cost x Actual Materialerial Used Standard Rate x Actual Labor Hours Used Standard Rate x Actual Labor Hours Used Standard OH Rate x Actual Labor Hours Standard OH Rate x Actual Labor Hours Finished Goods (Balance Sheet) Debit Credit Standard Cost x Quantity Produced Standard Cost x Quantity Sold Cost of Goods Sold (Profit & Loss) Debit Credit Standard Cost x Quantity Sold Sales Debit Credit Selling price x Quantity (excl. VAT) Accounts Receivables Debit Credit Selling price x Quantity (incl. VAT) Actual Spend During the Year Works order is issued, parts are picked and produced Works order is completed, parts are produced Sales is made: record the cost of sale Sales is made: record the sale