Industrial manufacturers have a specific set of needs when it comes to managing their business finances. Accounting for manufacturers has its own challenges, particularly for businesses that want to minimize wasted materials and resources (or so-called “lean” manufacturers). This approach requires an understanding of the entire production process and where cuts can be made to save money and boost productivity.
When trying to do your own accounting, it’s a good idea to start with what you should know or need to know about your business to get a baseline of your financial health. Once you know your financial health, you can take steps to improve performance and cut waste.
1. Evaluate the manufacturing process
Knowing your manufacturing process from end to end will help to identify weaknesses and areas of waste. You can start with the direct cost of labor and materials to produce your products.
Calculating the cost of your direct labor is one-half of your basic production cost before packaging and shipping. This calculation can give you an idea of what you’re spending to even make the product.
Direct material cost is the second half of the equation for determining the cost to manufacture products. In order for an industrial manufacturer to be considered lean, they must be able to minimize material waste during initial production as well as throughout the supply, packaging, and shipping process.
One of the ways you can prevent material waste is by recycling materials left over from the production process.
2. Understand how production costing works
There are essentially 3 types of production costing methods. Standard costing involves establishing a set cost for labor and materials for a single instance of a product. Knowing the exact production cost of a single unit of your product can help you improve profitability.
Variable costing is a method of costing products by the job or production order and marking them up accordingly to improve profit margins. This accounting method is best used for small runs of products or custom orders so that you can calculate what you should make on an individual job.
Activity costing is the final accounting method that details how many resources a particular type of product requires to be made. This method lets you determine how your resources are being distributed across products and which ones are more profitable than others.
3. Find accounting software
Knowing your numbers is a large part of the accounting process for a manufacturing business, but if you want to lower your costs and boost profits as effectively as possible, then the best thing to do is invest in manufacturing-specific accounting software to help track production costs, profits, and overhead.
These are just a few of the things needed to handle your manufacturing accounting and get your profits and productivity up while eliminating as much waste as possible. The better you understand your resource usage and the numbers behind it, the leaner you can make your manufacturing process.