Situation:
The client was a long established, family owned confectionery manufacturer and wholesaler, based in the Sydney area and supplying all locations throughout Australia and New Zealand.
Whilst the company was very well aware of what costs were directly involved in the manufacture of the goods, (i.e. the raw ingredients), when it came to overhead costs and labour, they were struggling to determine whether they were making profits on the goods it was selling, and why as well as being able to identify which products produced the best margins.
After running profitably for many years, they began experiencing difficulties with decreasing margins and profitability and experiencing other pressures placed on the business due to the increasingly seasonal nature of demand. dVT Consulting was approached to assist with the design and implementation of a costing system for the business.
Actions:
Starting from the ground up, dVT Consulting gathered available information like the production capacity, floor space, and basic costs of goods and operational costs. Some of the data was very specific and took into account areas such as waste-age on packaging for different sizes of finished goods, downtime for repairs and maintenance and cleaning of production machines, and the allocation of factory management costs on additional shifts and overtime. Historical records were also accessed to calculate average waste-age on product and packaging for inclusion into complete and comprehensive costing model and bill of materials.
Each of the standard recipes were then dissected into a cost per kg, before adding differential costs such as packaging and overheads as allocated, to come up with a range of standard costs that covered direct costs (raw materials and direct labour), costs to manufacture (including factory overhead) and costs to selling point (including administration overheads and selling costs).
Outcomes:
This range of costs enabled the company to make relevant and informed decisions on selling prices and stock levels, because they were then able to determine whether certain lines should be manufactured in priority to other lines, especially where the margins may have been different. They could also then decide whether some lines could be sold at a lower price (e.g. to discount clearance outlets) by reducing various input costs or reducing the margins.
This tool is now used for many business decisions including marketing and budgeting for future periods. Armed now with a complete bill of materials, the business uses it to forecast and manage sales by producing estimates of expected costs and profits and the order quantities needed to place orders for raw materials well in advance, enabling discounts on bulk purchases and ensuring supply at fixed prices. It also enables better management of the seasonally generated demand vs capacity mismatches ensuring all contracts for supply are now met, but with significantly reduced casual labour and overtime cost.
