Building Value Through Excellence in Cost

AccountingPresented by:Bart Bedard

OC IMA Dinner MeetingMarch 19, 2014

Bart Bedard – Last 27 years in mid-level to senior

management accounting and finance positions at manufacturing companies

BS in Accounting from BYU, MBA from CSUF, CPA, CMA

About the speaker

Profits

Cost Accounting

• Standard Costing

• Discrete vs.

Process

• Job/ Project Costing

• Service vs. Mfg.

• Average Costing

• Actual Costing

• Labor

• Material

• Overhead

• Tracked• Not

Tracked

Vari

an

ces

Every company has their own way

Survey

• How many of you work for a manufacturing or service company?

Survey

Of those that work for a manufacturing or service company:

1.The cost & gross margins reported are excellent

2.The cost & gross margins reported are adequate but could be improved.

3.The cost & gross margins reported are inadequate and cannot be trusted.

Bart’s Four Keys to Excellence in Cost Accounting

1.Understanding the Power

2.Right Staff3.Right Setup4.Variance Vigilance

Understanding the Power (of accurate costing)

•Accurate quantities on hand

Understanding the Power (of accurate costing)

•Accurate standard costs• Standard costs as close as possible to

actual

Understanding the Power (of accurate costing)

• Accurate standard costs

•Benefits to Sales

Understanding the Power (of accurate costing)

•Accurate standard costs• Benefits to Production

Understanding the Power

Gross Margins improved 10% over 6 years

(i.e. millions of dollars a year in profit improvement)

Profits

Right Staff

• Jim Collins author of Good to Great – “Get the right people on the bus”• Most important• Attitude & Aptitude**• Experience

Right Setup

•Bills of Material & Routers•Overhead rates

Right SetupBills of Material & Routers

Commitment & Dedication

Right Setup Continued

Overheads

Allocations & Cost Pools

Allocated

Individual Department Direct rates

Part of General Mfg.

Overhead Rate

Part of SG&A rate

DirectMolding YESCNC Plastics YESCNC Metal YESCNC Swiss YESAutomation YESAssembly YES

IndirectMachining YES YESTooling YES YESQuality Control YES YESQuality Assurance YESDocument Control YESFacilities YES YESGeneral Manufacturing YESProduction Control YESInventory Control YES

SG&ACorporate YESFinance & Accounting YES YESHuman Resources YES YESInformation Technology YES YESSales & Marketing YESR&D YES

Right Setup Continued

Any cost that can be reasonably allocated SHOULD BE allocated.

Allocate based on:1.Headcount2.Square feet occupied3.Number ERP software users4.Number of purchase orders

processed5.Etc.

Right Setup Continued

Any cost that can be reasonably allocated SHOULD BE allocated.Costs that should be allocated to benefiting departments:• Payroll taxes, Vacation, Sick pay,

401k matching• Medical, Workers’ Comp. Liability

and other insurances• Rent, Utilities• Etc.

EmployeeCNC

Swiss Maching Other TotalMary 20% 40% 40% 100%Joe 10% 80% 10% 100%Jane 15% 35% 50% 100%John 80% 15% 5% 100%Larry 20% 20% 60% 100%Gary 30% 30% 40% 100%Parker 40% 40% 20% 100%

Average 31% 37% 32% 100%

This example assumes all employees make about the same amount.

Tooling Department Allocation

Total Overhead

after allocations Total Labor

Productive Labor

Percent Productive

Labor

Overhead less

Productive Labor

Direct Overhead

rate Direct

Molding 100,000 40,000 80% 32,000 68,000 213%CNC Plastics 150,000 60,000 85% 51,000 99,000 194%CNC Metal 200,000 80,000 78% 62,400 137,600 221%CNC Swiss 75,000 30,000 88% 26,400 48,600 184%Automation 300,000 120,000 75% 90,000 210,000 233%Assembly 225,000 150,000 82% 123,000 102,000 83%

Calculation of Direct Overhead Rates

How often should standards be updated?

Given: Standard costs should be as close as possible to actuals.

• Annual?•Quarterly?•Monthly?

Capitalizing Variances

Variances are capitalized equal to the amount of variances incurred over the time it takes to turn inventory 1 time. E.g. 30 days.

Variance Vigilance

1.Errors2.Labor Efficiency3.Labor Absorption4.Material Usage5.Purchase Price Variances6.Overhead Absorption7.Follow up with Sales, Production

& Engineering

Direct Departments

Total Overhead

after allocations Absorption

Over (under)

absorbed

% Over (under)

absorbed Molding 100,000 90,000 (10,000) -10%CNC Plastics 150,000 160,000 10,000 7%CNC Metal 200,000 225,000 25,000 13%CNC Swiss 75,000 100,000 25,000 33%Automation 300,000 120,000 (180,000) -60%Assembly 225,000 150,000 (75,000) -33%

Profits

Thank you!