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By Neil Crowell, CPA, CIA, CFSA
Manufacturing and Distribution Industry Group Manager
Take a moment and think of the key decisions that drive the success of your business:
• What price should we charge for our product?
• How many units must we sell to break even?
• What product lines should we expand and which ones should we
discontinue?
• Should we make or buy?
What factor makes or breaks those decisions? ... The reliability of your costing system. Good cost data fuels sound decision-making and strategic business management, while poor cost data can reduce management to guessing. The following symptoms may indicate weaknesses in your costing data:
Uniform Profit Margins
Do all of your product lines have similar profit margins? If you use a cost-plus pricing strategy, this is to be expected. However, some costing systems allocate costs uniformly and globally, failing to properly allocate the costs of the unique production activities of each product line.
Little Competition
If you have a particular product or market where there is little or no competition, consider the source of that advantage. If it is price-based, consider whether your production processes are best in class in efficiency, or whether your cost system is deceiving you and you are under-pricing the product.
Inability to Compete
Often, having little competition for some products will coincide with the presence of other products or markets that struggle to compete. The under-costed products blow away the competition, while the over-costed products flounder. Pay particular attention to high-volume, standardized products, which are vulnerable to absorbing more than their fair-share of overhead costs.
Losing Bids with Slim Margins
If you are pricing competitive bids with razor-thin margins and frequently losing, do not be too quick to attribute the cause to the economic environment. It may be time to reevaluate your costing system and identify and remove inefficiencies from the production process.
Need help with your costing system? Contact a Manufacturing Specialist at Stambaugh Ness today for assistance.
Stambaugh Ness's Manufacturing and Distribution Services Group is a team of highly experienced professionals who are committed to understanding the unique challenges of the manufacturing industry. In addition to our traditional accounting and auditing services, we offer value-added services in business planning, operational analysis, strategic management, M&A assistance, and IT / systems consulting. Our resources are complemented through active involvement in local industry associations.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any US tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. |
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