Costing rarely breaks in a factory. Nobody sits down and decides to price a job wrongly.
It drifts, a little at a time, and the drift is invisible because every individual step
looked reasonable when it was taken.
You notice it late, and always the same way. Turnover is up and the margin is not. A job
that felt profitable turns out not to have been. The quotation for the next one is last
year’s rate plus a percentage, because nobody can defend a better number.
Here are four places the drift comes from.
1. The rate card is older than anyone admits
Machine-hour rates, labour rates and overhead recovery get set once, usually properly,
often by someone who has since left. Then power tariffs move, wages move, a machine is
replaced with a faster one, and the rates stay.
The rate card does not have to be wrong by much. A recovery rate that is 15% light on a
business running at a 12% margin is most of the margin.
Worth checking: when was the machine-hour rate last recalculated, and against what
month’s electricity bill?
2. Overhead is spread evenly across things that are not even
The simplest way to absorb overhead is per unit, or per rupee of material. It is also
the way that guarantees the wrong answer whenever the product mix is uneven.
A part that sits on an expensive machine for four hours and one
assembled by hand in ten minutes do not consume the same overhead.
Spreading it by value says they do. The expensive-machine part looks cheaper than it is. It is usually the one you
are winning tenders on.
Worth checking: is overhead recovered against a driver that reflects what actually
consumes it, or against whatever was easiest to get out of the system?
3. Freight and duty never reach the item
A consignment of imported components lands with freight, insurance, customs duty and
clearing charges on it. Posted to a freight account, all of that is correct in the
accounts and absent from the cost of the part.
The result is a part that appears to cost what the supplier invoiced.
It actually cost that plus 9% or 14%, or whatever the landing worked out
at. Margin reports built on
that number are wrong in a direction that flatters, which is the worst direction.
Worth checking: take one imported item and compare its cost in the system against the
supplier invoice. If they match exactly, the landing costs are somewhere else.
4. Standard and actual are never put side by side
Most factories cost at standard, because you cannot quote from an actual you will not
know for three weeks. That is fine. The problem is when the standard is never compared
with what happened.
A standard that is not compared is not a standard. It is a guess that has been written
down, and it stays comfortable for exactly as long as nobody checks it.
A system can hold both. Onfinity carries cost elements separately, each with its own
valuation method: standard, average, FIFO, LIFO. A standard cost and an
actual cost can sit against the same item. The difference is a number on
a screen rather than a suspicion.
Worth checking: for last month’s five biggest jobs, what was the variance between what
you costed and what it cost? If the answer is that nobody produces that report, that is
the finding.
The test
Pick one job you finished last month. A real one, ideally one you thought went well.
Add up the material at what it actually cost, including landing. The
machine time at a rate calculated this year. The labour, the overhead
recovered against something that reflects the work, and anything that went
outside for processing. Compare that with what
you quoted.
The gap is not a costing problem. It is what you have been bidding into, on every job
like it, for as long as the drift has been running.
Costing on one system
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When the work goes outside
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