Manufacturers Risk Inaccurate Financial Information Using Outdated Cost Models

Manufacturers may not be adjusting their cost models on an annual basis to capture the actual cost of producing a product. The result is inaccurate standard costs utilized in your financial statements which may cause over or understated inventories, and variances in the income statement that are not easily explainable. Decision making may be impacted due to the inaccurate financial information.

Noteworthy events like supply chain issues and ongoing elevated inflation can render your current standard costs and bill of materials (BOM) completely useless. An updated costing model can give business owners clarity of their cost, provide more accurate financial information, and how to take advantage of underutilized assets.

To keep your standard cost more aligned with actual costs, updates are required more frequently or in response to major events. We are seeing companies that have not updated their cost models in more than five years based on the fact their cost structures pre-COVID had minor changes.

Updating standard cost models in response to record-high inflation and supply chain disruption

Inflation reached as high as 9.1% in 2022, with an average rate of 8% over the course of the year. Like other sectors, inflation has hit manufacturers hard. More than 30% of manufacturers from the UHY 2023 Middle Market Survey cited hyperinflation as the most impactful event on their business. Cost increases are being felt in the manufacturing sector, including labor, materials, purchased components, overhead and more.

If you have not updated your standard BOMs in the last few years to account for not only inflation, but labor and overhead cost changes you are not capturing the actual cost of doing business. Therefore, updating your costing analysis including labor and overhead rates are crucial for costing and quoting purposes.

Establishing a standard cost model

The individualized standard cost models prepared by our experienced professionals account for a multitude of variables and are extremely complex and detailed, but there are basic steps to building a standard cost model which can be utilized to update your BOMs.

• Compile cost data
  • Determine quality and availability of historical cost data
  • Identify cost drivers
  • Collect and analyze data
• Set up the model
• Validate the model
• Evaluate the model against a variety of scenarios
• Provide savings opportunities
• Embed the model in the planning, quoting and operational process

You are not too late to update your standard cost model

Inflation and supply chain disruption has been driving costs up for the last two years, but there is still an opportunity to right the ship before any more time passes. Use the basic steps we provided as a starting point and consider enlisting the help of an experienced professional to reset your baseline cost model.