What are the best cost accounting techniques? For manufacturing companies, it’s a question as old as time. And there’s rarely a single answer, as each manufacturing organization strives to find the right approach. Production managers and cost accountants come together and work toward that perfect method to monitor costs, price products appropriately, and achieve a desired profit margin.
Hiring cost accountants in the manufacturing industry has its own set of challenges. Accounting techniques may be foreign to you as an HR professional or hiring manager, but you should understand the basics of costing before recruiting for the role. Below is a quick primer on cost accounting techniques for manufacturing companies and some tips on hiring for these roles.
Job Costing vs. Process Costing
The first things to understand in the world of cost accounting are job costing and process costing – and the difference between the two. As the two most popular types of cost accounting, the two approaches are often conflated and mistaken for each other.
Job costing, or product costing, tracks costs and revenue for each product or job. Costs—which include direct materials, direct labor, and indirect costs—are accumulated throughout the production process. The cost of a product or job is determined after it is completed.
Process costing focuses on costs in all steps of the manufacturing process. Costs are accumulated for each production process and averaged per unit produced in a given period. Unlike job costing, unit costs are estimated periodically throughout a production cycle.
Each method has its benefits; some manufacturing organizations may employ both techniques. However, job costing is best suited for costing when each product is unique. You will get a detailed look at how much an individual product costs. On the other hand, process costing is more appropriate when a company produces large quantities of standardized products.
Activity-Based Costing for Overhead Allocation
With either job costing or process costing, you must assign indirect manufacturing costs, which are commonly called “overhead.” For manufacturing companies, typical overhead includes rent, machine maintenance costs, utilities, and the like. For both job costing and process costing, overhead allocation is calculated with activity-based costing (ABC).
ABC refines overhead allocation using either costing method by identifying categories of overhead costs, known as cost pools, and assigning them to jobs based on cost pools or the activities that cause those costs. For example, a job that requires a more complex engineering design is allocated a higher share of the engineering cost pool.
Standard Costing for Variance Analysis
The next cost accounting technique is standard costing, which provides variance analysis. In other words, standard costing determines the variance between the amount projected for manufacturing costs and the actual costs.
Underneath this umbrella are several categories, such as direct materials variances, direct labor variances, and overhead variances. Simply put, each analysis highlights if various parts of your manufacturing process cost more or less than expected (or budgeted).
Investigating the reasons behind these variances allows your organization to take corrective actions. For example, if you determined material price variances negatively impacted your profit margins, you might negotiate with suppliers for better pricing. If you experienced high direct labor variances, cutting back on employees working overtime could be a solution.
Lean Accounting Principles for Waste Reduction
Standard costing often uncovers variances related to waste. Some common causes of waste include:
- Overproduction, or producing more units than necessary, and storing excess inventory.
- Defective products, which are scrapped or incur extra costs through reworking.
- Idle time for employees or machines.
- Excess raw materials in inventory.
Waste reduction is typically achieved through lean accounting principles, otherwise known as lean manufacturing. Lean is a framework for routinely analyzing waste and taking corrective actions. Every bit of successful waste reduction helps improve profit margins.
Implementing a Cost Control System
After your cost accounting techniques identify variances and waste, a manufacturing organization should implement a cost control system.
The two main components of such a system are cost reduction targets and performance improvements. You set clear and measurable targets for each and measure improvements in efficiency, waste reduction, and reduced overhead.
Tips for Hiring Manufacturing Cost Accountants
Now that you have a solid understanding of cost accounting techniques for manufacturing companies, you can better identify the best candidate for your organization. Here are some tips to help you through the hiring process:
- Identify your needs: Determine whether you need a candidate experienced in job costing or process costing. Your ideal candidate should also understand the complexities of manufacturing overhead and applying ABC in production scenarios.
- Look for versatility: The ideal cost accountant should be equally knowledgeable in both manufacturing and lean accounting principles. Technical proficiency with ERP applications helps, too.
- Involve your production team: As the cost accountant, I will work closely with your production team and involve them in the interview process.
- Prioritize cultural fit: Manufacturing organizations require strong teamwork skills. Your ideal candidate should be collaborative and willing to work with people outside the finance group.
Key Takeaway
Hiring a manufacturing cost accountant requires patience and diligence. This is an important role, so take your time to find a candidate who can hit the ground running. With what you’ve learned here, you’ll recognize that candidate once you meet them. For more helpful articles and insights into a wide range of industries, follow MRINetwork.