Most manufacturing companies use a standard costing system under a first-in
and first-out (FIFO) method. Under a standard costing system, predetermined costs for material, labor and overhead are established and used to determine the cost of the inventory. Management can then compare the actual cost to the standard cost to monitor and manage production performance through production and price variances.
Accurate Financial Reporting
This one is simple and it will make your auditors happy. Accurate standard cost inputs help in determining the overall value of inventory which is essential for fair and accurate financial statements. This ensures that the balance sheet and income statement reflect a true financial picture of the business. Significant increases in production or pricing variances (actual costs versus standard costs) may be an indication that it is time to revisit and adjust your standard costs.
Pricing Decisions
Knowing the true cost of inventory helps businesses set appropriate prices for their products. Management can then calculate pricing strategies that cover the manufacturing cost and a desired profit margin. Many businesses will take this one step further to understand the full cost of the customer relationship by assessing non-inventory costs which may include customer returns, rebates and other allowances, technical support or any extras needed to maintain the customer relationship.
Production and Other Decision-Making
Finally recording proper quantities and costs allows your materials requirement planning (MRP) process to work properly. This includes such processes or decisions such as when to reorder raw material stock and how much to order so the necessary materials are on hand to meet the production schedule.
Conclusion
Understanding inventory is the “lifeblood” of any manufacturing company. Understanding your inventory provides insights and allows management to make more informed decisions about purchasing, production and pricing.
At Meaden & Moore, we know manufacturing. And we differentiate ourselves by investing the time to deeply understand your business. We customize our services to fit your unique needs and deliver solutions that align with your objectives.
Reach out to us today to explore how we can help you navigate challenges and achieve lasting success.
