Step 1 – Collect Direct Spending
In order to calculate a process cost, the first thing you need is to collect the pools of direct spending at the account or sub-account level.  These pools represent dollars that you plan to spend (or actually spend in the case of actual costs) in the area.  Typical pools include labor, depreciation, and energy and the information is usually found in the general ledger.

Step 2 – Allocate Indirect Spending
Next, you need to focus on the spending that occurs outside the manufacturing areas based on the appropriate drivers.  Trying to determine the most appropriate driver is sometimes challenging (see Picking the Right Driver Is Important To More Than Just Your Golf Game), but the focus should lie in finding a driver that you are able to measure and capture.

Step 3 – Calculate Cost Center Rates
Once you’ve pooled the dollars for the production area, you can then calculate rates expressed in dollars per “something”.  That something depends on the rate.  In most cases, the rate is stated in dollars per machine hour, dollars per batch, or even a simple dollars per unit produced rate.  Now, you can keep the rates at the natural cost element or cost pool level so you’re able to use a unique driver for each rate and provides a better view of the composition of the production area.

Step 4 – Proper Assignment of Process Rates to Products
Finally you can assign costs to the products using the calculated rates.  As products move through the production area, you’re able to assign costs at the natural cost element or cost pool level using a differed driver for each pool.

Comparing the costs associated with a particular machine, department, line or location gives you the information to decide where and how to manufacture products.  By calculating process costs, you know how costs are accrued as they pass through your manufacturing process.

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As an ERP implementer, you know that customizing an ERP module can be a time consuming and expensive proposition that will potentially prohibit your customer from taking advantage of future upgrades and maintenance. Even after the pricey modifications, companies who have complex manufacturing processes are still likely to turn to spreadsheets or attempt to build external systems to do the real analysis necessary to run the business effectively. ImpactECS has become the costing system of choice for many process manufacturers because it can handle detailed costing processes while limiting or eliminating the need for ERP customization, spreadsheets or custom development.

With ImpactECS, many of our customers have expanded their ability to perform challenging cost accounting tasks in a fully integrated environment. Don’t believe us? Here are a few examples of world-class manufacturing companies from very different industries that selected ImpactECS to handle their costing instead of customizing their ERP systems:

Paper producer, Domtar Inc., has grown through a number of acquisitions and ended up with a scenario that many companies face – multiple instances of SAP in different parts of the company. Complicating the situation even further was the fact that there were different costing methodologies employed in the different locations, making comparisons and performance management nearly impossible. Instead of choosing to start from scratch by customizing a new SAP costing tool, they selected ImpactECS as a way to both create a standard methodology and bridge the two instances of SAP to manage all of their costing data in one centralized location.

Tyson Foods, one of the leading poultry processors in the United States, faced some more unique problems when attempting to calculate product costs using SAP. The disassembly process, when a live bird is portioned into individual pieces, has lots of complexities that a traditional ERP cost module is not equipped to handle. Since ImpactECS’ model building capabilities is flexible enough to mirror any process, Tyson was able to develop a very detailed costing system that allows them to perform advanced variance analysis. In addition, the commodity nature of their product requires the ability to calculate a daily actual cost so they can price their products appropriately in the market and ensure that they remain competitive.

Understanding the changing prices of raw inputs is a critical need for process manufacturing companies like potato giant, J.R. Simplot. Chances are that if you had an order of fries at lunch today, Simplot produced them. Prior to ImpactECS, Simplot used JD Edwards along with a full complement of spreadsheets to establish their standard product costs. This month-long, manual process was reduced to a fully-automated process that only takes matter of hours to perform. Beyond product costing, Simplot uses ImpactECS to analyze scenarios like “What happens to my product costs if the price of cooking oil goes up 5% next quarter?” Instead of an analyst spending hours building a standalone spreadsheet that is likely based on faulty logic and incomplete data sets, ImpactECS has the tools to run what-if scenarios using the same logic and data used for product costing. The result is more confidence in the results and a better tool to make decisions.

The semiconductor industry has a unique set of costing challenges due to the complexity of their manufacturing process and the lifespan of their products. Analog Devices uses ImpactECS as its costing platform because it provides granular cost results at every WIP point in their fabrication process. By combining production data from PROMIS, spending information from SAP and costing logic stored in ImpactECS, Analog developed a completely automated costing process with a common methodology that works for their seven manufacturing facilities. Beyond costing, Analog Devices has expanded the use of ImpactECS beyond product costing by building a subcontractor pricing engine within their costing system. Analog now has visibility into standard costs at the vendor level to accurately develop budgets, track subcontractor spending, and make decisions on how and when to outsource parts of their manufacturing process.

So, what makes more sense? (A) Asking your customer to commit time and resources to a customization project that will ultimately cost more and deliver less, or (B) looking to ImpactECS to get a fully integrated costing tool that can enhance your customer’s ability to make better operational decisions. If you’ve chosen B, then we invite you to learn more about the ImpactECS Enterprise Cost System by visiting www.urlbd.com.