Manufacturing Accounting 101

First, I am not an accountant.

However, I do like numbers and math.

I also like ratios.

This past year, I began studying expense ratios. My preference is to take expenses and break them down into dollars spent in specific categories (e.g., tooling, lubricants, hubs) per pound produced. Expressing the ratio in this manner is helpful for three primary reasons:

• It avoids the divide by zero error if, within a given time frame, no money is spent within a category.
• It makes it possible to determine quickly the dollars saved or lost compared to a previous time frame or to another facility.
• It corrects expenses for volume produced. This has been particularly meaningful during this down economic time. If volume is down, expenses like tooling should be down by a similar percent.

Above, I have included a true example of this type of analysis to demonstrate the value of this type of detail. For Expense Category I, Facility A has spent almost double the number of dollars pound per pound as the facility spent last year. It has spent almost five times the number of dollars pound per pound as Facility B has spent year to date.

This concisely demonstrates significant discrepancies, and I quickly facilitated strategies for improvement at Facility A.