Cost management in manufacturing – easier with ERP

The success of most manufacturers heavily relies on accurately determining standard costs. These costs form the basis for pricing their products and are crucial for ensuring profitability. Even a slight underestimation of standard costs can greatly impact profitability. Utilising an Enterprise Resource Planning (ERP) system can assist manufacturers in effectively managing costs.

Understanding manufacturing costs

Let’s break down manufacturing costs into 3 main categories. Firstly, there are direct costs like raw materials, labour, and energy. Then there are indirect costs such as rent, utilities, and equipment maintenance. Lastly, variable costs fluctuate with production levels, while fixed costs stay constant regardless of production.

Implementing an ERP system can streamline cost identification and categorisation, empowering businesses to efficiently monitor and manage expenses.

What is manufacturing standard cost?

Manufacturing standard cost represents the cost per unit, typically calculated on an annual basis, encompassing the various expenses associated with (when applicable), and determined based on a standard production quantity (economic order quantity, EOQ):

  • Materials
  • Labour
  • Machinery
  • Outsourced operations
  • Overheads

Material costs include the expenses related to raw materials and any subcomponents.

Labour and machinery costs are typically calculated per hour, based on the anticipated time required to complete the EOQ.

Hourly machinery costs are typically determined by considering factors such as machine operation expenses like power, lighting, depreciation, maintenance, and spare parts.

Outsourced operations account for the costs incurred from obtaining external services from third-party sources.

Overheads may include additional expenses linked to materials (e.g., warehouse and material handling labour) or labour (e.g., supervisor labour costs).

In cases where subcomponents are involved, lower-level assemblies’ machinery and labour costs are integrated into the material costs of the higher-level assemblies. Certain ERP systems allow for a breakdown and analysis of these costs (multi-level costs), providing a deeper understanding of the cost structure.

How an ERP can help with manufacturing cost control

A manufacturing ERP system offers a range of benefits for managing and calculating manufacturing costs effectively:

  • Inventory management: Optimise inventory control to prevent excesses or shortages that can lead to increased expenses.
  • Inventory valuation: Determine the total cost of the inventory at the end of an accounting period to ensure accurate accounting standards. Methods such as FIFO (first-in-first-out), LIFO (last-in-first-out), and standard costs can be used to assign value to inventory.
  • Production planning: Enhance production efficiency by accurately planning based on demand and capacity.
  • Cost of goods sold (COGS) valuation: Track the direct costs of products (which vary with revenue changes) and absorption costing (fully allocating overhead costs). Ensuring that both material and manufacturing costs are accounted for.
  • Real-time visibility: Stay informed with up-to-date data to monitor production costs and make proactive adjustments.
  • Process automation: By automating repetitive tasks, an ERP system minimises errors and saves valuable time and resources.
  • Cost analysis: Utilise analysis tools to pinpoint areas for savings and assess the impact of cost-related decisions.
  • Supply chain integration: Strengthen collaboration with suppliers and streamline logistics to reduce overall costs.
  • Constraint analysis: Identify bottlenecks in the manufacturing process and understand how changes can impact throughput.
  • Waste reduction: An ERP system helps to manage production lines and equipment, offering dependable data to drive ongoing enhancements and combat waste. This can help some businesses to reuse waste for other products and support a circular economy model.
  • Margin analysis: Compile all product-related costs and deduct them from product revenue, to determine the margin for each product. While margin analysis is crucial, it is also important to consider constraint analysis to avoid making inaccurate decisions in product sales.
  • Variance analysis: Identify the reasons for variations between actual costs and budgeted costs related to materials, labour, and overhead.
  • Budgeting: Data from analyses mentioned above, as well as targets and strategies for the year to come, help establish the annual manufacturing area budget.

Conclusion

Understanding your manufacturing costs and how they stack up against standard costs is key to maximising profitability in your core manufacturing operations. With real-time production monitoring, you can track actual costs on a job-by-job basis and compare them to the standard costs. The Sage X3 ERP system allows for adjustments based on real events, ensuring accurate profit margin reflections. This process also helps pinpoint any production issues for prompt resolutions.

Contact us today to discover how Sage X3 can make your manufacturing cost management easier.

If you would like to find out about Sage X3 for Manufacturing and manufacturing ERP systems in general, take a look at our other helpful guides including:

Eight essential value propositions in manufacturing ERP

A guide to Sage X3 manufacturing

Reimagining manufacturing

If you would like to discuss your project with us, please contact our team or book a Sage X3 demo.

2024-06-24T16:46:17+00:00June 24, 2024|Blog|
Go to Top