Cost, profitability analysis and budgeting process. What do they have in common?

Whether your organization is in the service, manufacturing or distribution sector, making a profit is never quite as easy as you might have hoped.

Many companies ask themselves the same questions:

• What are our most profitable products/services and clients?
• Why are we not able to reconcile budgets with production costs?
• Why do our profits not correspond to our projections?
• Why does our fixed cost allocation seem so simplistic?
• Why do we not have a better grasp of the operational data for our products/services?
• What is the best way to deal with increasingly stiff competition?
• What kind of investment would be most profitable for our company?
• Are our costs really in line with our operations?
• Why is it so difficult to produce variance analyses that, when finished, are still incomplete?
• Is it possible to have a dynamic budget that reflects changes in our operations?
• How can we help our managers cut costs?
• Can we give our managers a better understanding of fluctuations in their costs and help them better manage these fluctuations?

If you find yourself asking any one of these questions then production cost analysis is for you! Regardless of their size, many companies have trouble with this issue. Indeed, very few understand their production costs well enough to use them as a reliable decision-making tool.

Around the end of the 80s, companies began talking about different costing methods: activity-based costing (ABC), theory of constraints, process costing, function costing, etc. Each of these has its own particular pros and cons. At DECIMAL, extensive experience has taught us that, no matter what method you use, the most important thing is to know your organization inside out. Also, the person in charge must be 100% convinced that their costing method is the most appropriate and be a good communicator, as these qualities will ensure an integrated, long-term production cost solution.

Before we discuss implementing production costs, we must first pinpoint the major factors that increase company value. Knowing these factors will enable you to:

• Direct production cost analysis initiatives
• Simplify the production cost model
• Rapidly generate the required strategic analysis data

Your production cost model should do more than simply evaluate the cost of your products/services. It must take into account the main performance indicators used by management to set company strategy. These indicators must be incorporated into the model so upper management can assess different scenarios and the model can be put to optimum use.

For the past twenty years we have been developing structured, proven management methods to help companies improve their market position. Over the years, a single theme has emerged that unites production costing, profitability analysis and budgeting: namely, to understand operations or, more simply, to set up a cost behaviour model.

In order to evaluate the cost of your products/services, you must make sure your production cost system reflects your actual operations. Do any of the following sentences apply to you?

• I have recently (within the past few years) increased or modified the products/services I offer
• My clientele has increased and/or changed
• My production cost model was updated over a year ago
• New work practices have been implemented within the past few years
• Some company managers question our production cost or the pricing of our products/services
• Some company managers dispute inter-departmental expenses

If any of the above situations sounds familiar, DECIMAL can provide speedy assistance! For over twenty years, DECIMAL has been offering effective consulting services and technological solutions that can help you to:

• Accurately assess the cost of your products/services,
• Draw up a strategic plan,
• Better understand the impact your operations have on costs and products/services,
• Implement solutions to manage, control and optimize costs.

Since its inception, DECIMAL’s focus has been on implementing production cost, profitability analysis and budgeting systems in a wide variety of organizations. Once equipped with these systems, many organizations realized just how many of their products/services were incorrectly priced, thereby sabotaging the company’s strategies.

Utilizing its specific and exceptional expertise in activity-based cost management, DECIMAL has been a consistent and vocal proponent for technological and practical progress in this field, as evidenced by its active association with different research groups associated with cost management, such as the Consortium for Advanced Management International (CAM-I) and Université Laval’s Chair in Cost Management. DECIMAL also provides training for CPA Quebec, CMA Alberta, CMA Canada and at a number of Quebec universities.

The methods devised and used by DECIMAL are being adopted by an ever-growing number of companies and research groups because they make it possible to obtain much more accurate production costs. These enable managers to make better strategic decisions that take corporate reality and executive concerns into account.

Adopting DECIMAL’s proposed cost identification methods gives managers a whole new company vision, obliging them to call into question the relevance of many operations. By optimizing the resources allocated to each operation (rather than the opposite), company work habits are transformed, leading to a dramatic improvement in financial performance.

The main advantage of these methods is that they pinpoint the performance measurements best suited to the company, thereby focussing cost control initiatives where they are most needed. This also leads to better planning and better follow-up of established objectives.

Implementing a production cost model enables companies to:

• Facilitate project financing decisions,
• Improve managers’ grasp of cost and the organization as a whole,
• Control and measure organizational, economic and demographic changes within the company,
• Establish accurate production costs per products/services,
• Justify sales prices to clients,
• Have a better understanding of margins when negotiating with clients,
• Achieve a balanced budget,
• Justify requests for additional resources,
• Easily grasp how human and financial resources are being used,
• Justify implementing and measure the impact of organizational changes.

Additional advantages of a good production cost model:

• Easily initiate the budget preparation and forecasting process,
• Evaluate different scenarios,
• Ensure cost visibility,
• Strengthen manager accountability,
• Measure capability and efficiency at the operational and organizational level so you can “Offer more for less”,
• Establish closer ties between cost centres and break organizational silos.

Strategic Cost Management brochure

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