Complex Manufacturing Environment
Nov 03, 2015
A few days ago, I met with a potential client to discuss some of the costing issues faced by their organization. In this particular case, the CFO was relatively new to the organization and was being called upon to a help set for a complex series of manufacturing processes. The company offered a variety of products and services from one location and the diversity of offerings created a convoluted web of all the possible cost recovery methods, which were not easy to resolve.
The CFO came to us for advice on how to structure a cost recovery system in an extremely complex manufacturing environment. The system would need to sort out complexities in both cost and customers, as well as recovery methods. For example, one of the processes was merely a rental where customers were renting space and equipment both on a long and a short-term basis. In this instance, the company was attempting to determine how to recover all of the costs associated with owning, maintaining and supporting the rental space being made available to the customer. This was particularly complicated because some customers only needed the space for a short period of time with a limited number of processes while others required a much more extended period of time and numerous processes. These differing processes and differing time frames made it difficult to compute any rates. specifically, for what equipment and space and for how long! Further complicating this side of the business was that of differing needs by similar customers. In one case, customer A would need equipment for a given period. A few weeks later, the same customer would rent a different array of equipment space.
Another aspect of this operation was the manual labor controlled environment in which products were being produced. Processes were not dependent on any machine but rather a crew of people doing simple manual tasks. Although the processes were simplistic in nature, the sheer number and types of processes to be completed varied along with the crew sizes necessary. It was apparent by touring the operation that this part of the process was relatively simple to understand, but was highly diverse in both crew sizes and run lengths. Therefore, it would require an entirely different recovery system than that of the space and machinery rental process described above.
The third process being used in this operation was a complete machine controlled environment where labor was merely a supporting cost for the operation of the machine. In this case, the company was producing products through an entirely machine-controlled environment, again, at varying run lengths and speeds dependent on the nature of the product. It was a relatively new process for the company and they were attempting to settle on appropriate rates of production, crew sizes, and other operational decisions related to the process and the speed. The CFO recognized the costing for this process would have to evolve as the process became more defined.
Although we did not discuss this topic as part of our initial meeting and tour, it seemed quite likely that in several of these operations there may be byproducts being produced which should have some costing effects. The materiality of the amount and frequency of which it would concur was not a topic of discussion but will be addressed sometime in the future as we get closer to getting the start of our project for this business.
Categories: Cost Accounting