In manufacturing, there’s a tension between calculating costs accurately and efficiently. Leadership would prefer to know exactly what it costs to produce every unit. But getting that information takes time, visibility, and granularity that aren’t readily available. So many split the difference by relying on average costing: dividing the cost of the whole production run by the number of units produced.
It’s understandable under the circumstances. It’s also undeniable, however, that average costing is less than perfectly accurate. And when costs aren’t accurate, profits go missed, potentially leaving substantial sums on the table.
Now there’s a fix to make cost calculations both accurate and efficient. For anyone relying on averages, raising profit margins has never been easier.
Why Averages are Inaccurate
Average costing is a compounding problem. It starts by spreading costs evenly across products, without regard to variations in labor requirements, material costs, and overhead expenses. That, in turn, leads to poor visibility into which products and processes drive higher or lower costs. Large differences are flattened into averages.
Averages are essentially a form of incomplete data, which has real consequences when it comes to costing. The amount something costs determines the price, which in turn determines competitiveness and profitability. Average costs might do more than just bleed profits; they could undermine a manufacturer’s ability to grow, thrive, or even survive in today’s challenging markets.
The Alternatives to Averages
Switching from average to actual costing comes down to visibility. When managers can clearly track each input that goes into producing a product, they can accurately calculate the cost.
Activity-based costing makes that possible. It allocates costing based on activities, such as the number of staff and labor hours it takes to make something, or the amount of time it spends stored in a warehouse before being shipped. Tracking activities rather than deferring to arbitrary percentages reveals what each unit actually costs.
Which leads to another question: how can manufacturers track activities and calculate averages? This was always the obstacle in the past because the data was too difficult to collect, integrate, or analyze. Now, with a modern ERP from Infor, the process couldn’t be simpler.
An intelligent ERP can integrate with IoT devices, digital sensors, MES tools, and other data sources tracking what happens on the factory floor. Then it can run that data through cost calculators that reveal the true cost of each product, how those costs break down, when and where they’re rising and falling, and how they affect revenues and profits. Essentially, Infor ERPs take the hard work that used to make actual costing feel impossible and makes it effortless.
The Benefits of Accurate Costing
Accurate costing makes manufacturers stronger in many ways:
- Precise Production – Improving production starts with knowing which products and processes are driving costs and profits.
- Greater Profitability – Differentiating between high-margin and low-margin products leads to substantially higher profits over time.
- Smarter Strategy – Planning and adjusting the company strategy depends on having an accurate, updated understanding of economic conditions.
- Consistent Compliance – Preparing for audits and creating financial statements feels less risky with easy access to reliable numbers.
Bring an End to Average Costing
With the right tool and team, the transition from average to actual costing is short, smooth, and simple. Infor ERP comes with all the tools it takes. The team at Guide Technologies adds the experience and expertise.
Start exploring how an ERP upgrade could unleash bigger, better business opportunities. Contact Guide Technologies today.
