Dunn_Converter_Cost-Acct

© 2014 Flexpacknology LLC
Understanding Cost Accounting for Better Results
Tom Dunn Flexpacknology LLC
Designing Products and Processes for Profit:

Today’s agenda
Framework Dimensions
Converting
Context
Converting
Translations
Converting
Tools
Organization
Impact

Why go here?
1. When you’re up to your neck in alligators
1. Remember why you’re in the swamp
2. “Cost accounting”
1. Managerial accounting
1. Purpose: input to support decision making
1. Where did the money go?
2. Where did the time go?
3. Did we execute as we planned?
2.What should we change? Keep the same?
1. For improving financial results
2. For improving quality levels
3. For increasing throughput/productivity/yield

33-year old Leslie Nielson as Francis Marion
(The Swamp Fox )
Walt Disney Presents (1959-1961) (ABC)

Converting
Context
Converting
Translations
Converting
Tools
Organization
Impact
In other words: 1
Why do we
want to go
into this
swamp?

Converting
Context
Converting
Translations
Converting
Tools
Organization
Impact
In other words: 2
How big
are the
alligators?

Converting
Context
Converting
Translations
Converting
Tools
Organization
Impact
In other words: 3
Will the
alligators
hurt me ?

Converting
Context
Converting
Translations
Converting
Tools
Organization
Impact
In other words: 4
How do we
deal with
alligators?

Converting
Context
Converting
Translations
Converting
Tools
Organization
Impact
In other words: 5
What do we
use to catch
alligators?

Converting
Context
Converting
Translations
Converting
Tools
Organization
Impact
In other words: 6
Who watches
my back for
alligators?

Learning Outcomes?
Maybe wrestle alligators during Tuesday’s networking time?!
http://alligatoradventure.com/

Learning Outcomes!
1. After this Short Course you will:
1. Understand various types of costs
1. Direct and Indirect
2. Cash and Non-cash
3. Variable and Fixed
2. Recognize examples of these in converting operations
1. Raw materials
2. Labor
3. Overhead
4. Equipment purchases
3. Appreciate how such distinctions can estimate job costs
1. Distributed costs
2. Machine hour rates
4. Apply Operational Equipment Efficiency metrics for managing cost
1. Availability
2. Performance
3. Quality
5. Appreciate which organizational groups can control costs
1. On the Floor
2. In the Office

Why do we want to go into this swamp?
Framework
14

Cost  Financial Accounting
ACCOUNTING
Financial
Accounting
Lenders,
Boards,
Stockholders
Cost
Accounting
Supervision &
Management
Short Course October, 2014

Definition: cost accounting
A detailed managerial accounting system containing
detailed plans and reports intended to support a
company’s decision making*
1. Nature: accounting system
2. Purpose: decision support
3. Users: internal tactical and strategic decision
makers*
* e.g. decide how to improve quality & financial results,
if/when to buy new equipment or rebuild old,
schedule maintenance, staff machines, etc.

Financial Accounting:
Cost of goods sold (COGS)
Category example
Revenue $1,000
Cost of Goods Sold ($600)
Depreciation ($200)
Income $200

Cost of goods manufactured
+ Begin RM inventory
+ RM purchased
- End RM inventory
equals Direct Material Cost
+ Mfg labor
+ Mfg Indirect OH
equals Manufacturing Cost
+Begin WIP inventory
- End WIP inventory
equals COGM

Cost of goods sold
+ Begin FG inventory
+ COGM
- End FG inventory
equals COGS

Framework Recap
1. Financial Accounting
2. Cost Accounting
3. Decision support
4. Cost of Goods Manufactured
5. Cost of Goods Sold

How big are the alligators?
Dimensions
21

Cost accounting vs. financial accounting
1. Focus in financial accounting:
1. The firm
2. (or profit centers in the firm)
2. And comparing its costs to its revenues
3. Focus now:
1. the product
2. (or product type)
3. (or product lot )
4. And assigning costs to product/type/lot

What does it cost?
Divided by common language
 What did it cost?
“What does the price tag say?”
 Not what it cost to buy!
 but what did it cost to make
value

What did it cost to make?
 Materials
Straw
Flowers
ribbon
 Labor
Weaver
Assembler
24 Short Course October, 2014

What did it cost to make? plus
 Materials
Straw
Flowers
ribbon
 Labor
Weaver
Assembler
 Machinery
Loom
 Plant
Rent/Mortgage
Utilities
Taxes
Insurance
Supervision
Maintenance
Quality

What did it cost to make? plus, plus
 Materials
Straw
Flowers
ribbon
 Labor
Weaver
Assembler
 Machinery
Loom
Mold
 Plant
Utilities
Taxes
Insurance
Supervision
Maintenance
Quality
•Overhead (SG&A)
Executives
Sales
Advertising
Development
Accounting

To each cost item its due
1. Direct manufacturing costs (attributable to the item)
1. Making one hat requires:
ITEM UNITS AMT
Straw pound 0.75
Flowers each 6
Ribbon Feet 1.5
Weaver hours 0.5
Assembler hours 1.0
Loom hours 0.75
2. Indirect manufacturing costs (“allocated” to the item)
1. Making the hat also involves:
Supervision Maintenance Quality Building

Typology of costs
1. Direct and indirect
2. Variable, semi-variable and fixed
3. Unit costs
1. Variable unit cost (~ constant with volume)
2. Fixed unit cost (decreases with volume)
3. Total unit cost
4. Cash and non cash
1. Depreciation
2. Labor
5. Inventoriable costs
1. Direct material costs
2. Direct manufacturing costs
3. Indirect manufacturing costs
6. Period costs
1. Spent but not in inventoriable costs

Dimensions Recap
1. Fixed  Variable
2. Direct  Indirect
3. Period  Inventoriable
4. Cash  Noncash
5. Manufacturing overhead
6. SG&A overhead

Will the alligators hurt me?
Converting Context
30

Financial accounting
Manufacturing company: 2 accounting systems
Cost accounting
 Document transactions
– Some cash
• Payroll
• Supplier payments
– Others
• Inventory movement
• depreciation
 Document activity
– Involves resources
• Time-based
• Tangible
– “Time is money”
• 1hour = ? USD
– Support decision makers

Financial accounting
Manufacturing company: Ideal accounting
Category example
Revenue $1,000
Cost of Goods Sold ($600)
Financial costs1 ($200)
Income $200
Cost accounting
example
Revenue $1,000
Job Costs ($600)
Financial costs1 ($200)
Income $200
1. e.g. Depreciation, interest

Cost to manufacture a flexible packaging job

Job costs typology
1. Direct/Indirect with respect to the job
• Data acquisition becoming automated
• ERP: shop floor control-materials management
• Traceability requirements
2. Variable/Fixed with respect to the job length
• Semi-variable (step changes)
• Volume related
• Width related

Job costs geography
VARIABLEFIXED
DIRECT INDIRECT

Job Costs assignment
Materials
Rollstock
Resin
Print cylinders/plates
Run duration
Labor/Time
Waste
Facility
Supplies
Packaging
“Wets”
Set up
Time
Waste
Facility
Supervision
Support
Utilities/tax/insurance
Rent/mortgage
SG&A
Management
Sales
R&D
Finance/HR/IT
VARIABLEFIXED
DIRECT INDIRECT

Manage the five “M”s of manufacturing

Five “M”s of converting
 Methods
– printing
– Laminating
– slitting
– Bag/pouch fabricating
 Materials
– Rollstock
– Resin
– wets
 Manpower
– Operators
– Maintenance
– Warehouse
 Measures
– Print quality
– Bonds
– GCs
– Width/length
 Machines
– Presses
– Laminators
– slitters
– Bag/pouch makers

Classify the 5Ms for job costing
Element Direct/indirect Variable/fixed
Materials direct variable
Manpower
direct-operators
indirect-support
variable
fixed
Machines
direct- utilized
indirect-idle
variable
fixed
Measures direct- assigned variable
Methods (the basis for adding value!)

Quantify the 5Ms for job costing
Element Unit of cost Unit of use Cost
Materials $/pound pound $
Manpower $/hour hour $
Machines $/machine hour ?
Measures Time+money/each each Time +money
Methods ? ? ?
TOTAL ?
Apportion real financial costs in a way that helps to make decisions!

Converting Context Recap
1. Converting costs: direct/indirect (a job)
2. Converting costs: variable/fixed (a job’s length)
3. Allocated costs
4. 5 Ms of manufacturing
5. 5 Ms of converting
6. Unit of cost/unit of use

How do we deal with alligators (bodies)?
Converting translations (material)
42

For 1 pound of product: buy 1.1 lb of raw material
effectively a10% tax on cost of raw material!
Material costs ($/lb)
0.1 lb of
waste

Product produced/(material wasted + product produced)
Material Yield
Material Yield(%) =
product(lb)
[Setup waste(lb)+run waste(lb)] +product(lb)

Waste: set up and run
• Set up waste: fixed amount per job set up
• Unit cost =(RM cost + value added)
• Run waste: Fixed % per unit length
• Unit cost =(RM cost + value added)
• Run length: (total impressions)
(cut off*no. across)
• Run waste %: (Σ trims @ each process) * 100
(web width)

Calculating waste
Assume:
Job size: n impressions
Web width: 12 inches (1 foot)
Cut off: 12 inches (1 foot)
No. across: 1
Set up waste: m feet
Run waste: 0.6 in each side
Waste generated/ job
Run length: n ft (n imps* 1foot/imp)
Run waste: 1.1*n (0.6+0.6)/12)
Job waste: m + 1.1*n ft

Short job
Managing waste
Long job
run waste drives total waste
0%
20%
40%
60%
80%
100%
120%
140%
160%
0 10 20 30 40 50 60 70
RunWaste%
Run length:ft '000
100 1000 1500 set up waste: ft
0%
20%
40%
60%
80%
100%
120%
140%
160%
0 2 4 6 8
Runwaste%
Run length:ft '000
100 1000 set up waste: ft
Set up waste drives total waste

Converting Translations (Materials) Recap
1. Waste “tax’
2. Material yield
3. Set-up waste
4. Run waste
5. Job size effect on waste

How do we deal with alligators (moving)?
Converting Translations (Time)
49

Productivity
1. measure of output per unit of input
1. Manpower Inputs ($/hr/person * persons)
2. Machine output ($/machine)
• Financial accounting: “depreciates” capital expense
over “useful life”
• Depreciation (as current year’s expense): “depends:”
Straight line charge ($/Yr)
(capital cost)–(salvage value)
Service life (years)
Replacement cost charge ($/Yr)
(replacement cost)–(salvage value)
Service life (years)

Machine hour rate from $/machine
Consider cost to actually operate the machine:
• rent
• utilities
• supervision
• maintenance
• inspection
! labor
Calculate effective hourly cost given the annual
budget of the facility and scheduled production time
Charge ($/yr)
Schedule (hr/yr)
= hourly rate ($/hr)

Machine hour rate
Converting as a business
1. Buy raw materials from suppliers
2. Add value with resources rented from owner
• Machines
• Manpower
• Methods
• Measures
3. Sell value-added product to customers
Normalized to $/hr rates

Constant production rate = X fpm
Production:
m*X (ft) =
[m minutes x (X fpm) +
[b minutes x (0 fpm)
Calculation: production

Duration:
m*X + b(min) =
[m minutes x (X fpm) +
[b minutes x (0 fpm)
=m*X + b
Calculation: duration

Linear feet produced/time required to produce them
Calculation: effective production rate
Effective Rate (efm) =
production
duration

Increase run speed
Production graphs
Decrease set-up time
0
100
200
300
400
500
600
-20 80 180 280 380 480
linearfeetThousands
Minutes into job
speed1 speed2 Speed3
0
100
200
300
400
500
600
0 100 200 300 400linearfeetThousands
Minutes into job
set up 1 set up 2 set up 3

Increase run speed
Production graphs-observations
Decrease set-up time
 Production advantage for
longer run times
 Down time (speed = 0 fpm)
has greater impact with
higher speed
 Production advantage for
shorter run times
 Down time (speed = 0 fpm)
has no impact

Converting Translations (Time) Recap
1. Productivity
2. Machine hour rate
3. Job production
4. Job duration
5. Effective production rate

What do we use to catch alligators?
Converting tools
59

Allocation of flexible packaging sales
Material Other Mfg Costs
Direct Labor Sales/Adm/R&D
Profit before tax
US Flexible Packaging Industry 2012 (FPA)

Output
Time
cost
Machine
Weighting
Material
cost
$/(1-w)
Productivity: $output/$input

Time
Productivity: calculation
 Allocate all facility costs to all
staffed time
 Job time:
(set up time + run time)
 Set up time:
(set up time x # set ups)
 Run time:
(imps x imps/min)
 Time cost:
(job time x machine hr rate)
Material
 Effective cost:
RM cost per lb / (1-w)
 Effective cost rate:
Effective cost x lb /min
 Material cost:
Effective cost rate x run time

Unit value x
units sold
Job time
X MHR
Run time
X ECR
Productivity: Dollars to Dollars

Unit value x units sold
Job time x MHR + Run time x ECR
Output
Improving Productivity
 Unit value x units sold
Input
1.
2.
1. Job time x MHR
Plus
2. Run time x ECR
Productivity Increase
output
Decrease
inputs

Increasing output
Unit value x units sold
• Raise value
• Sell more

Decreasing inputs
1. Job time x MHR
1. Lower set up time
2. Increase speed to lower run time
3. Add shifts to “spread out fixed costs”
4. Reduce indirect costs (plant & SGA)
2. Run time x ECR
1. Lower RM cost
2. Lower waste
Be careful what you ask for!

Unintended consequences
1. Reduce indirect plant costs: e.g.
 Cut back maintenance efforts
 more frequent and longer equipment outages
 Reduce frequency of quality checks
 Increase in customer complaints
2. Reduce waste: e.g.
 No slab policy
 Increase labor cost at slitting
 Reduce trims
 Increase in unusable material

Multi-machine product costing
1. Cost of time
• job time x machine hr rate
• Each machine has its own capital charge
• Plant and SG&A “allocated”
2. Cost of materials
• Effective cost rate x run time
• Values:
• $WIP > $RM : $waste increases with each step
3. Cost estimation
• Understand value of material at each step
• Standards for set ups and run speeds
• Total cost = sum of costs at each machine

Operational Equipment Efficiency (OEE)
• Theoretical output
• equipment operating continuously
• maximum output rate (i.e. product per hour)
• 365 days per year
• 24 hours per day (8760 hours per year)
• Obstacles to realizing theoretical output:
• time during which the equipment does not operate
• Not staffed to run
• Not able to run when staffed
• product fails to meet commercial acceptability requirements
• Actual output / theoretical output =OEE

OEE Availability
Availability
A Total Production Time
B Actual Production Time Breakdowns
Wait/changeover

OEE Performance
Availability
Wait/changeover
Performance
C Theoretical Output
B Actual Output Minor stops
Slow speeds

OEE Quality
Availability
Wait/changeover
Performance
Slow speeds
Quality E
Good
product
scrap
Rework

OEE Computation
Time
units
ProductionProduction
units
Availability
Wait/changeover
Performance
Slow speeds
Quality E
Good
Product
scrap
Rework
OEE = Availability x Performance x Quality

OEE graphically

OEE numerically
MEASURE CALCULATION
OEE
Good product
Loaded time
Operational
effectiveness
Good product------
Total Operations time
Net utilization
Good product
Total time
Asset utilization
Theoretical output
Total time
Capital utilization
Loaded time
Total time

Divide and conquer
1. Availability: Is the machine running?
↑ Less time spent on set ups
↑ Perform checks at work station
↑ Fewer unplanned outages (preventative maintenance)
2. Performance: How fast is the machine running?
↑ Overall machine maintenance
↑ Process capability
3. Quality: Does product meet requirements?
↑ Process consistency
↑ Raw material quality

Minimum order size
Economic order quantity (EOQ)
1. Both time and material costs have
1. Fixed (per job) components
2. Variable (per unit produced) components
2. Job has:
1. Market value
2. Job cost
3. Job time
3. Production margin: (Market value-job cost)
4. Production margin rate: (Production margin/job time)
5. Minimum acceptable target production margin rate=?

EOQ example
 Production margin
=$375
 Set up time=.25-1 hr
 Run time=0.25 hr
 Total time=0.5-1.25 hr
 Production margin
rate= $300-$750
 Target margin rate 
0.5 hr set up time
$0
$100
$200
$300
$400
$500
$600
$700
$800
00.250.50.751
Rate
Set up time-hr
$500 target margin rate

Increasing minimum order size  Lower EOQ
1. Lower fixed costs: Critical
1. Set up time
2. Set up waste
3. Direct fixed costs (e.g. print plates/cylinders)
2. Market premium for small job quantities
1. Mass customization
2. “Market-size of one”
3. Digital printing

Converting Tools Recap
1. Productivity calculation
2. Unintended consequences
3. Multi-machine product costing
4. Economic order quantity
5. Operational Equipment efficiency
1. Availability
2. Performance
3. Quality

Who watches my back for alligators?
Organizational impact
81

Decision making: Facility
1. Operator behavior
• 5S methods (a place for everything/everything in its place)
• Cross training
2. Line supervisor choices
• Staffing levels on equipment
• Staffing levels for support functions
3. Facility management choices
• Maintenance practices
• Incentive systems
• Continuous improvement
• Corrective actions

Decision making: Management
1. Costing estimates
• Current set up times and run speeds
• Raw material quantity estimates
2. Product line proliferation
• Manufacturing complexity
• Change over impacts
3. Technology/best practices adoption
• Cross-industry benchmarking (e.g. NASCAR)
• Anticipated benefits vs. realized benefits
4. Capital expansion decisions
• Increase capacity of in-place capital: work practices
• Technology to change fixed & variable cost patterns

Job costing
Decision making: Support
Time
Set up
min-max-
Avg
Material
Set up
waste
Run
waste
Continuously
improve
Continuously
improve
Adjust prediction
factors
Adjust prediction
factors

Decision making: Support
Job costing
• Actual results compared to anticipated results
• Material-set up waste
• Material-run waste
• Time: set up
• Time: minimum/maximum/average run speeds
• Consolidate gains and change factors that
calculate anticipated results

Organizational Impact Recap
In-class Exercises
 Facility-centered effort to add incremental
capacity
 Management-level consideration of OEE metrics
to increase productivity

Dunn_Converter_Cost-Acct

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