Same Process, Different Productivity

Mar 12, 2015

One of the questions we frequently receive at seminars involves cost managers having to deal with costing problems in their own operations that are related to similar processes. Typically, these processes are being done on different lines with radically different levels of productivity.

This issue is generally related to different technology, different training of workforces, different machine layouts or a whole variety of other factors that fundamentally affect the productivity of one line in a plant doing process A as compared to another line in the same plant also doing process A.

We have observed cost managers who have computed different costing levels for different lines doing the identical process. As a result, employees in the sales department or the service department, for instance, are constantly shifting production to the lower-cost line to improve profitability of products. However, the less productive line then has ever-increasing amounts of idle capacity and becomes a burden on the rest of the manufacturing process because it is not working anywhere near capacity. I have seen this issue for the same process in one location or perhaps the same process scattered among a number of manufacturing plants, each with radically different levels of production. This results in one standard cost being computed for the product resulting in radically different variances from plant to plant depending on which operation originally set the standard. If these kinds of operational differences are recognized and allowed to affect the standard cost of products, companies can have gains or losses with regard to interplant transfers of identical products, but with differing standard costs. This makes profitability by customer, by product, by plant or most any other segregation very difficult to administer.

My suggestion would be to consider all similar processes at the same cost so that standard costs for products are identical regardless of the lines which produce them. This eliminates arbitrary reassignments of production runs to lines perceived to be more efficient because of standard costing techniques that leads to unproductive allocations of resources.

It is a constant concern that certain unproductive lines create excess product cost as compared to similar lines in the same plant or in the same company. However, our overall approach is to continue to account for them identically.

Management should embark on the task of improving productivity on the lower productivity lines to make it more comparable to the highest and best line or begin the process of changing the technology to improve productivity.

I am familiar with one company that measures productivity carefully between plants with similar operations and then isolates the most productive lines to do virtually all of the same work the company needs to meet its sales demands. Thus, Plant A does virtually all the part for production part 1 because they’re most efficient, but then Plant B does all of the processing for production part 2 because they’re more efficient. Even though there might be production capacity and resource issues within the plants, the majority of the process done in each plant is focused on the highest and best use of that plant based on their historical operations.

Categories: Cost Accounting