Management of production costs of engineering enterprise JSC Stroydormash

In modern competitive conditions and active expansion on the Russian market of products of producers from the Asian countries, it is vital to manage effectively costs and costs of production for the purpose of their decrease and improving competitiveness of products. It is possible to manage costs in mechanical engineering only in the presence of accurately built business processes and highly effective tools capable to service and support these business processes. The effective tool in which we managed to organize business management process and cost reductions is the ERP system the IT Enterprise.

As at most engineering enterprises of Russia, on JSC Stroydormash till June, 2008 the boiler (inventory) method of calculation of actual cost of products which main sense was as follows was applied: "Everything what for the end of month did not get in production, belongs on costs and cost value". Because of complexity of production it was impossible to define costs for release by each unit. The main shortcomings of the specified method were:

• null information about actual cost of each unit of production by cost elements;
• lack of an opportunity to explain the arisen deviations in product cost and the effective mechanism of cost analysis;
• lack of operating control behind write-off of costs in production in relation to production of DSE, products;

• lack of an opportunity to trace cause and effect relationship between acceptance managerial * esheniye heads of workshops, masters, and changes in cost value (such decisions on production are made daily: write-off of materials and component parts on replacement, incorrect write-off of materials, change of the production technology, write-off of unaccounted materials, etc.);

• impossibility to verify the actual structure of a product with that structure which is stored in a PDM system as reference.

All these tasks and would remain unresolved if not arisen urgent need to increase quality of production management in 2007 when the product demand significantly advanced production capabilities. To understand the existing restrictions of production capacities we had to look for the worthy ERP system capable to solve similar problems at technology difficult level, using the newest techniques of planning of MRPII, MES, APS. A choice was made for benefit of the ERP system the IT Enterprise.

Thus, through the need for effective management of production we came to podetalno-step-by-step accounting and calculation of cost value on its basis.

Podetalno-pooperatsionny accounting in production

From 1/1/2009 the main method of calculation of actual cost at the enterprise is the method based on podetalno-step-by-step accounting in production. The essence of a method consists in operational accounting of costs in production on development of each detale-assembly unit (transaction) of DSE. Operational accounting in all production divisions of the plant and the movement of all of DSE is performed on direct actual costs, from the moment of write-off of materials on the first transaction with the subsequent accumulation of costs on technical process.

The basic accounting business processes in production are provided:

• step-by-step processing / development of DSE (parts, assembly units);
• transfer of DSE on a process flow from one division in another;
• act of defects, act of selection of defects of the supplier, act of disassembling;
• input of a remaining balance and deviation of inventory.

As a result of transition to the specified cost accounting method we avoided the parallel, not connected among themselves accounting: operational quantitative in production and financial cost accounting. Today production (managerial) and accounting is one accounting – operational, quantitative and cost. The main document which connected this accounting in one - is the production document "Act of Development". This document fixes development (production) of DSE on each technology transaction and its cost on direct actual costs. The further movement DSE in production is followed by accumulation of costs on the subsequent transactions, transferring the cost from write-off of materials before production and implementation of finished goods.

Quickly (to the day) all production divisions create documents of development of DSE in which the fact of production and at the same time write-off of costs for this development is quickly fixed.

Each act of development quickly fixes write-off in division of raw materials, materials, component parts, the normative salary in lines of write-off of the document "Act development", and respectively fixes costs for production of DSE taking into account the entering costs by calculation articles.

At the end of reporting period, after closing (delivery in a card file and quotations) all production documents, the accountant performs a certain sequence of system actions for calculation of actual cost.

The main stages of calculation of product cost are:

• Calculation of the sequence of document handling;
• Formation of a summary task for production of DSE (formation of calculations and distribution of indirect costs to release). At this stage, at the end of the month accounts on which the distributed costs form are closed: 25,23,16 (accounts of RBU) which are distributed in proportion to a base pay under everyone "Act of development" of each production division.
• Formation of accounting references under the calculation articles (according to these documents the accounting entries reflecting cost value of the turned-out and goods sold form). Accounting references contain the product range to which the actual calculations by calculation articles form.

With transition to podetalno-step-by-step accounting:

• understanding of an essence of process, accomplishment of the sequence of system procedures and control of correctness of the received result became the main objective of the accountant at cost;
• calculation of actual cost stopped being "a black box" which one specialist understood and which extremely reluctantly shared information and an explanation of the received result;
• accounting of DSE in accounting began to be reflected at production cost value;
• need of distribution of indirect costs to cost value of finished goods, WIP disappeared. As it was mentioned, all indirect costs are distributed in places of their emergence on all development of division that reflects actual cost of products significantly more precisely.

Thus, podetalno-step-by-step accounting which main criterion of use is existence of the modern approaches to enterprise management based on the ERP, MRPII standards opens opportunities to effective management of the enterprise.

Operating control of direct costs in production

The main effect from use of podetalno-pooperatsiony accounting can be gained at a stage of operating control of costs in production and also in the analysis of actual cost of products and an explanation of the received results with interpretation of the reasons at the most bottom level of shop accounting.

Operating control of costs in production allows to control in the on-line mode write-off of raw materials and the materials completing charge of a normative piece-work pay. Control and variance analysis is performed first of all from direct heads of production divisions (workshops) and also the director of production as the person who is responsible for the direct product cost budgeted. Business processes on JSC Stroydormash are configured so that control of the prices of the purchased materials and consumption rates of raw materials and materials are within the competence of the Director of production who through the approval of specifications on purchase (control of the price) and the operational analysis of the made decisions in workshops has an opportunity to influence process of formation of actual cost of products.

Fixed asset of control of operational write-off of materials, raw materials and component parts, operational replacements in production is the report in which all deviations by calculation articles, consumption rates, the prices of materials on production divisions with indication of the responsible persons who created the document are fixed.

This analysis allows to manage effectively in real time direct costs in production which create further product cost. The burden of an explanation of deviations in product cost, explanations on dynamics of work in progress passed from accounting to production divisions and the director of production, i.e. found the legal owner.

As production costs are reflected quickly, there was an opportunity to create operational financial results on business, with calculation of planned execution (forecast) income and expenditure budget.

Cost accounting system in custom-made production

One of topical issues of accounting and cost analysis in modern innovation mechanical engineering is the question of the organization of accounting, calculation of costs and cost value of products in the production divisions which are turning out custom-made (experimental) products, neither production structures, nor the technology preparation of production which often does not have.

Need to pass to a new method of the cost accounting and formation of cost value of custom-made (pilot) products arose for the same reasons that were specified in shortcomings of boiler accounting which was applied also in development shops.

The technique allowing to consider all direct costs by each released unit of production and to distribute indirect costs on the corresponding orders was developed for the solution of this task on JSC Stroydormash.

At the first stage in accounting two sub-accounts were selected: 20/013 to each workshop which is turning out custom-made products (the material account considering write-offs of the main materials, component parts, the chassis by orders).

At the second stage for accounting of the distributed costs to the 20th account of RPS non-material account 20/014 (the distributed costs of development shops) on which account is kept on orders was opened and costs are distributed on development of end finished goods.

The method of calculation of cost value assumes operational write-off of materials, purchased component parts from the material 10th account of RPS in debit 20/013 (the material account of work in progress), with indication of number of an order.

Further, after input of development of finished goods the main production document "Act of Development", indirect costs are distributed in proportion to article "base pay". Further, all movement GP in a circuit of accounting is performed already on actual cost.

Thus, there was an opportunity to accurately create production cost value of custom-made products by each unit of production.

Analysis system of actual cost of products

Analysis system of the actual cost (which is turned out or a goods sold) as business process represents the sequence of actions which establishes connection between the arisen step-by-step deviations and the reasons which caused them.

At the first stage the actual calculations for any period form (month, quarter, year, from the accruing result).

At the second stage if the purpose - the analysis of cost value without structural shifts, forms planned calculation on the actual release (implementation) taking into account planned structure and the prices in calculation.

The third stage - step-by-step comparison of planned and actual costs in product cost The fourth stage – search of the specific products entering into group of homogeneous products in cost values which have essential deviations from planned cost. An essential deviation the deviation more than 10% on each cost element conditionally is considered (raw materials and materials, component parts, the chassis, etc.)

The fifth stage – formation of the actual structure of a product with step-by-step interpretation of costs, and display in the cellar of the report of reasons for rejection in product cost.

Possibilities of the ERP system the IT Enterprise allow to configure necessary reports for variance analysis in product cost on all cost elements.

At most, what it was possible to expect earlier in the analysis of product cost when calculating by a boiler method – it on distribution of actual costs is proportional to standard costs. Actually, all analysis came down to ascertaining of the actual deviations in this or that direction without an opportunity to understand the reason and to draw conclusions for timely acceptance of management decisions.

Managerial effect

The main managerial effect from calculation of actual cost on the basis of the podetalno-step-by-step cost accounting in production was gained from:

• transparency of the cost accounting in production and clearness of their education;
• cost control on-line from responsible heads of production divisions;
• the efficiency of formation of the product cost which both is released, and implemented;
• to timely acceptance of management decisions on cost management;
• to operational forecasting of a marginal profit by the sold products;
• the analysis of a marginal profit by all transactions with clients;
• to operational formation of a forecast financial result.

Use of this technique significantly facilitated communication with superior organization – the holding company, shareholders when carrying out Board of Directors. Questions from the field of "analysis" and clarification of deviations were displaced to the area of the analysis of decision making.

The motivation of production personnel, first of all directors of production underwent material adjustments. One of the main indicators of motivation became – cost value of products, and that the most important, understanding of the mechanism of its formation and capability appeared to have an impact on it, making these or those management decisions. Also the psychology of people changed, understanding of how the made decisions have an impact on a final result came.