An Invaluable Pricing Tool: Software to Help You Calculate Your Costs
Written October 16, 2019
Most everyone agrees that the foundation of calculating accurate prices depends upon calculating accurate costs. Today a variety of vendors offer software that helps you in this daunting task. Software to assist you in calculating your Budgeted Hourly Rates is designed to save you weeks of time in keeping all of your cost center rates current and accurate. Once the rates are established initially, you will have a vehicle available for keeping your cost center rates current in a timely fashion.
Through a series of maintenance programs, you can enter or change budgeting information which is annual in scope down to the cost center level. The rates computed in the software are typically based on annual chargeable hours at up to three levels of productivity. Many of the maintenance programs will normally utilize auto-calc to minimize the amount of entry required and maximize the correctness and completeness of the data. Most of the information needed for entry of the budget information is contained in your financial records: general ledger, union contracts, bank and leasing company records, personnel wage records, historical sales, and production trends. Cost center definition is very important so that equipment and employees can be identified properly.
The cost of equipment, employees, expenses, and total chargeable hours must be defined in order to arrive at a budgeted hour cost per chargeable hour (i.e., total annual cost center expense divided by the number of chargeable hours per practical capacity levels). Through the use of this type of software you are able to factor into your costing methodologies FICA maximums, unemployment amounts, non-union health care dollars, workman’s compensation, and different health insurance plans. In all cases, the best proration factor (e.g., square footage, investment in cost center, kilowatt hours, etc.) must be established for the process of spreading expenses back to each cost center where a direct link does not exist. Fixed costs (e.g., rent, insurance, property taxes, etc.) as well as all variable costs (e.g., direct labor, indirect labor, lighting, power, repairs, etc.) must be defined. After establishing all cost centers, annual budgeted amounts, allocation factors, general factory expense, and selling and administrative overhead, you now are ready to enter data into the various programs designed for the purpose of automatically calculating the allocations and spreading the allocation expenses within the cost centers.
The calculation programs should ensure that the amounts total down and across the column on the spreadsheet by cost center. If the totals are not equal, typically you may request that the program automatically recalculate them and put them in balance. Any additional changes can be updated in order to produce new or revised rates. A full range of reports and listings such as productive hours, budget hours, employee, and cost center allocation reports should be part of this software. Listings for general factory expenses, selling expenses, corporate administrative expenses, and employee salaries should be available. Often software of this type may be interfaced directly to your cost center files or used in a stand-alone environment for multiple “what if” scenarios. You will find that software which calculates your Budgeted Hourly Rates will be the cornerstone of your costing system.
You will be able to determine cost center rates accurately, update them quickly and easily each year, and estimate rates on potential purchases of new equipment for your operation. All of this information can then serve as the foundation of your “cost plus” pricing methods.
Assuming you have accurately determined your costs and are using these as the basis for your pricing, the next step is to measure how close your actual costs are stacking up against your estimated costs – your Actual versus Estimated comparison. The costs you have calculated are associated with each operation in your plant. Now you measure the time and quantity of material used in producing a job.
This forms your actual costs. Lining up the time and resulting dollars you estimated for each step of the production process with the time and resulting dollars you actually spent producing the job is the heart of any good costing and pricing system. The results of this analysis can tell you if you need to adjust your assumptions in estimating, provide training for specific employees performing specific tasks, or need to invest in equipment in order to meet changing demands.
Your MIS system should provide you Estimated versus Actual comparisons by department, cost center, employee, and shift by date or date range. Some systems also have the option to develop standard costs and report efficiencies by cost center and employee. Job status reports should be available instantaneously and provide detailed definitions of cost by chargeable labor, materials, and outside purchases (OSPs).
Furthermore, author alterations (customer changes) and rework costs should be classified separately on the report. The estimated versus actual section should allow for a detailed comparison of costs. The system should also have the ability to add costs to a job that has already been invoiced for proper historical costing.
Profitability on a job should be accessible at any point in the production process so you have the ability to adjust your plan as the need becomes apparent. It is preferable that your system include the ability for automatic notifications be sent to decision-makers should profit levels reach an uncomfortable level. Ultimately, your MIS system should include the facility to measure the success of your sales people at a glance, with the ability to drill into the details as required. The dashboard elements below provide a good example of the on-demand displays that are available today.
Through a series of maintenance programs, you can enter or change budgeting information which is annual in scope down to the cost center level. The rates computed in the software are typically based on annual chargeable hours at up to three levels of productivity. Many of the maintenance programs will normally utilize auto-calc to minimize the amount of entry required and maximize the correctness and completeness of the data. Most of the information needed for entry of the budget information is contained in your financial records: general ledger, union contracts, bank and leasing company records, personnel wage records, historical sales, and production trends. Cost center definition is very important so that equipment and employees can be identified properly.
The cost of equipment, employees, expenses, and total chargeable hours must be defined in order to arrive at a budgeted hour cost per chargeable hour (i.e., total annual cost center expense divided by the number of chargeable hours per practical capacity levels). Through the use of this type of software you are able to factor into your costing methodologies FICA maximums, unemployment amounts, non-union health care dollars, workman’s compensation, and different health insurance plans. In all cases, the best proration factor (e.g., square footage, investment in cost center, kilowatt hours, etc.) must be established for the process of spreading expenses back to each cost center where a direct link does not exist. Fixed costs (e.g., rent, insurance, property taxes, etc.) as well as all variable costs (e.g., direct labor, indirect labor, lighting, power, repairs, etc.) must be defined. After establishing all cost centers, annual budgeted amounts, allocation factors, general factory expense, and selling and administrative overhead, you now are ready to enter data into the various programs designed for the purpose of automatically calculating the allocations and spreading the allocation expenses within the cost centers.
The calculation programs should ensure that the amounts total down and across the column on the spreadsheet by cost center. If the totals are not equal, typically you may request that the program automatically recalculate them and put them in balance. Any additional changes can be updated in order to produce new or revised rates. A full range of reports and listings such as productive hours, budget hours, employee, and cost center allocation reports should be part of this software. Listings for general factory expenses, selling expenses, corporate administrative expenses, and employee salaries should be available. Often software of this type may be interfaced directly to your cost center files or used in a stand-alone environment for multiple “what if” scenarios. You will find that software which calculates your Budgeted Hourly Rates will be the cornerstone of your costing system.
You will be able to determine cost center rates accurately, update them quickly and easily each year, and estimate rates on potential purchases of new equipment for your operation. All of this information can then serve as the foundation of your “cost plus” pricing methods.
Measuring the Success of Your Pricing Accuracy
Assuming you have accurately determined your costs and are using these as the basis for your pricing, the next step is to measure how close your actual costs are stacking up against your estimated costs – your Actual versus Estimated comparison. The costs you have calculated are associated with each operation in your plant. Now you measure the time and quantity of material used in producing a job. This forms your actual costs. Lining up the time and resulting dollars you estimated for each step of the production process with the time and resulting dollars you actually spent producing the job is the heart of any good costing and pricing system. The results of this analysis can tell you if you need to adjust your assumptions in estimating, provide training for specific employees performing specific tasks, or need to invest in equipment in order to meet changing demands.
Your MIS system should provide you Estimated versus Actual comparisons by department, cost center, employee, and shift by date or date range. Some systems also have the option to develop standard costs and report efficiencies by cost center and employee. Job status reports should be available instantaneously and provide detailed definitions of cost by chargeable labor, materials, and outside purchases (OSPs).
Furthermore, author alterations (customer changes) and rework costs should be classified separately on the report. The estimated versus actual section should allow for a detailed comparison of costs. The system should also have the ability to add costs to a job that has already been invoiced for proper historical costing.
Profitability on a job should be accessible at any point in the production process so you have the ability to adjust your plan as the need becomes apparent. It is preferable that your system include the ability for automatic notifications be sent to decision-makers should profit levels reach an uncomfortable level. Ultimately, your MIS system should include the facility to measure the success of your sales people at a glance, with the ability to drill into the details as required. The dashboard elements below provide a good example of the on-demand displays that are available today.