It’s Engineering’s Fault . . .

Feb 11, 2014

Have you ever heard someone say this phrase? Regardless of which side of the fence you are on (the accountant or the engineer), there is likely some truth to that comment. When we ultimately discover that our product cost may be in error, how often do we attribute it to the inception of the product?

product engineerBy inception, I am going back to design and trial runs, and ultimately the initial production of the item. If your team is on top of this phase, any variances in original design are minimized and captured immediately for better material and labor utilization. According to this recent study by the Aberdeen Group the second most significant issue prohibiting a new product’s success was that the product cost more to produce than originally expected. Well, what was “originally expected” is the costs assigned to the original manufacture of the product. Let’s hope that the design engineers reviewed every available alternative and have accessed to what those manufacturing costs are for each alternative. This is a team effort. If they are working from bad costs, how can they possibly maximize the design and manufacture of the item for minimum cost?

In addition, they have to incorporate this into what the customer needs and desire and make sure it is a quality product. This is tough job if you are working with bad information to start with.

I met with a client not too long ago who was facing similar issues. Similar to any manufacturing company, during the estimating process assumptions are made as to material needed, cycle times needed, and routings. This estimate is what is used to provide a solid quote to the customer- so a materially accurate cost at this point is very important. Once the estimate has been prepared, a pre-production test is run which consists of a small number of pieces (around five) to verify the materials, routes and overall production process.

They had a feeling that something was amiss with the new product cost, so they decided to sample 12 recently launched products. Of the 12, 9 had significantly higher costs from what had originally been estimated.

Some initial investigation led them to discover that the biggest problem was in the material cost: • There were hefty fluctuations in inbound freight and material cost itself (a highly volatile raw material base) • Corresponding yields from the materials were not being consistently updated • Prices of the materials were not being updated consistently

So was it engineering’s fault?

To summarize, we know that it is imperative to include cost assessments into the engineering and design phase of the product. Again, they have to have access to current and accurate information if they are to make cost minimizing decisions as to how the product should be built. They rely on the management accounting team to make sure that information is accurate and accessible to them. So, it may be engineering’s fault if they are using that accurate information to construct a poor design and workflow. Or, it may be the accountant’s fault for not providing the most accurate information to the design and engineering team.

Either way, it can have a huge detrimental impact to the profit margin if not addressed. The particular company decided to implement a comprehensive review of new products to specifically identify if and why the product costs had changed since the original design. Don’t lay blame, make the fix!

Categories: Cost Accounting