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Manufacturing Variances

For a manufacturer, to achieve a business goal of increasing the company’s revenue and improving profit margins, you need to understand your manufacturing costs and how to effectively manage and improve those costs. If only achieving this was easy. Often it occurs that finance and manufacturing personnel lack sufficient understanding of the ERP system’s integrated points between manufacturing and finance, the cause and effect of costing and related processes, and how manufacturing variances occur in detail.

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If your company is manufacturing a product, you’re creating manufacturing variances. These variances tell the manager where the company is not performing to the standards that were created and agreed to by those responsible in the Engineering or Production Department. There is almost a 100% chance you are creating either favorable or unfavorable manufacturing variances and, quite frankly, none of the variances will ever be favorable because the company is either over-costing or under-costing the production parts.

These variances might all be reported in one account in your General Ledger called Manufacturing Variances. The devil, however, is in the details and the details come in the form of Direct Labor, Raw Materials, Manufacturing Overhead and Subcontract costs. If your company has several production departments, you might have a set of these variances for each department. Companies with better business practices go further to define the variances into Rate and Usage to determine if they are incurring actual costs higher (or lower) than the standard cost. These companies will also benefit from the variances telling them if they are using more (or less) of the labor or raw material than specified in the Method Master.

The problem companies have is that the production people do not understand the nature of how the variances are created. Training helps, but if it’s not done on a timely basis to examine actual results to the Method Master, the variances will never be acted on. Another problem lies with the accounting department not having adequate knowledge of the production processes to “see” the nature of how the variances were created and how best to act on them. This takes a fair amount of training too.

At 2W Tech, we have generated reports that will detail your manufacturing variances and methods to use filters to cull out those variances outside of a set range of acceptable “norms”. The “norm” for a Direct Labor variance might be +/- 5% of the Standard Direct Labor. Another “norm” might be in a dollar value amount of Raw Material variance not-to-exceed +/- $300 to the Standard Material Cost. The 2WTech report will filter for those variances falling outside the Standard’s values and allow management to review production results more quickly and make the changes to minimize future manufacturing variances. If you are in need of help with your reports or better understanding how technology can help you control your Manufacturing Variances, give us a call today.

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