How to help the manufacturing or production management ERP for production cost identification?

How to help the manufacturing or production management ERP for production cost identification?

Business that is production based has to look in to various types of parameters to obtain their final product. Production management ERP has a huge role in managing all the production activities along with identification of cost. Production management ERP has various options along with a lot of calculation and analysis that it helps the production companies to not only identify the cost but also gain insight of what changes are needed to obtain more profit.

There are various types of cost that are levied on the product; some can be easily calculated whereas some are hidden. In order to start any business there needs investment and mostly it’s occurs at taking loan at specific interest rates. Various kinds of cost occur in business based on the nature of business in. Most of them have following basic cost associated with them:

  • Documentation cost
  • Leasing or buying of land
  • Capital may be at some interest rate
  • Machinery cost
  • Labor cost
  • Insurance cost
  • Office stationary cost, etc.

Above are the costs that can be easily known. This cost is direct cost where it directly impacts the cost of the product. There are various other kind of cost that have a huge role in the final product cost. These are the implicit cost that affects the organization at various levels. One needs to be very conscious while handling implicit cost in their business.

Implicit cost is the hidden cost that company has occur which cannot be described as direct cost. For example if a company declares holiday for 2 days then the amount of work output would not occur. This directly affects the cost of product. If in the market someone is giving negative feedback of our product and it affects the production demand then also it’s a type of cost that affect our whole production process.

Changes in the government policies have a great impact on the final cost of the product. Tax changes makes raw material more costly. If there are any changes in the rates of export or import that too has as impact on the final product cost.  Over all if we look at the type of direct cost involved that can be described as:

  • Opportunity cost
  • Fix cost
  • Variable cost
  • Labor cost
  • Explicit cost
  • Implicit cost
  • Accounting cost
  • Economic cost
  • Direct and indirect cost

Various other type of cost is involved based on the kind of business. But if as a whole we try to make analysis on cost identification, we need to consider these aspects in to business.

All the above parameters are so important to analyze whether the company is moving in the right direction of generating profit. It’s a challenging thing to make analysis for past, present and future of cost identification by business man running big or small business.

Production management ERP has a very big role in identification of cost of product to the company. It has various sections for the company to input values. This are based on the expenses occurred at the time of doing business activities

Production cost is simply calculated by fixed cost +variable cost the whole divided by no of units produced. Here there are various kinds of fix cost available such as rent cost, electricity bills, insurance cost, loan interest, salaries, machinery loan etc.

Variable cost includes raw material cost, miscellaneous expenses, government taxes, labor cost, etc. There is various other type of cost that is also involved in any production of product. Some are of onetime cost and other is accidental cost. All this affects the cost of production. But how to identify all of them and get accurate data of cost of production?

At initial stage business owners calculate cost of production by the below formula. The total no of units produce to the fixed plus variable cost one gets cost of production.

Cost of production= (Fixed cost+ variable cost)/ no of units produced.

Variable cost can vary from business to business. There are also hidden expenses that occur which business owner needs to control in order to generate profit. This variable cost is crucial to know and Production management ERP helps to indentify it.

 

Following is the way how production management ERP can be helpful in analysis of variable cost.

  • Historical cost analysis

Here we have the data of the cost of various items included in the production process. Like for example we have the cost of raw material for a process. Let’s say a company for making potato wafers. Here potato is the main raw material. Its cost varies from time to time based on the time of availability of potato. Prices changes based on season. All this is recorded in the ERP system and we can get to know the best time for getting our raw material. Final product can be stored preserved and this leads to identification of low cost of raw material.

Manufacturing management ERP helps in knowing low cost of raw material. One can get a control of the identification of the final product cost.  Likewise there are various other variable costs that can be identified once we have its historic records.

The information available from the data can be use as a template in order to create a new business. This vital information is of much use in knowing the break even analysis of calculating the price of the product.

  • Region specific analysis

Region specific analysis includes the cost that occur region wise. If you take example of manufacturing unit to get establish inside the city then it may more fix cost value. It is advisable to establish it near the city area than inside the city.  When we do that other cost of fuel and labor cost increases. Similarly for complex business process of manufacturing we need to take in to account all the factors that are included into it. Manufacturing management ERP helps to calculate all this cost.

If we take example of manufacturing process of any software for medical purpose. It is a complex process with so many factors involved in identification of cost. The process itself may take around few years to develop final product. This has a lot of impact as to in which region it gets develop.

For India we have Bangalore as IT hub where one can easily get high skilled IT person to solve such complex process. Along with that one can get funds through some investors specifically available in that region.  Now can you imagine this product to get develop in Jammu and Kashmir?  Certainly not.  Also if we try to develop this product in Kerela we need to do a lot of cost accounting.

Manufacturing management ERP helps in analysis of the cost involved which could be region specific. One can input all the parameters of skilled labor cost, raw material cost, land cost, etc and many complex parameters which are difficult to analysis manually. One can compare both and can get to the final decision of which place would be more profitable to set up factor and control the fix and variable cost.

  • Government policy analysis

Government policies plays an important role in identification of the cost involved in making a product. Like there are certain subsidy available for production of certain products. This will be available for some time period. Similarly there is relaxation of tax for certain time period for some products. After that time automatically tax will be levied. All this plays an important role in identification of cost of product.

When we are establishing any company, we take into account all this. Production management ERP has set a value which calculates government tax on the product. Detail information about the various types of taxes levied on various type of product can be calculated and this helps in identification of cost of product.

Like for example there is production of gunny bags in the country. Gunny bag supply crunch in India occurs at various time periods. Government to boost its production gives concession on taxes. These are variable based on time. Based on the type of business we can pre set the values of tax concession and get accurate identification of cost involved in making gunny bags.

  • Global market comparison

The price of final product is not uniform globally. If you take example of eyeliner say Lakme. Its price varies from India to UAE to US. What makes price differ from country to country. Products that are made in India with different prices in other country takes in to account various parameters.

The export or import duty levied on the product can lead to variation in cost of product. Import and export duty is variable in nature. For some years export duty is fixed and it changes drastically for another year. All this data is analyzed in making wise decision in the cost identification of the product.

Manufacturing management ERP has option available where user can set values of tax or any other global market parameters. If the currency change occur; which is daily, then it affects the cost of unit. Production management ERP is dynamic in calculating this which helps the company to get aware of the profit margin involve.

  • Budget Analysis

The budget of any company if highly responsible for the amount of unit produce. Various types of income and expenses occur in business and all this are recorded in production Management ERP software. The amount of capital needed for producing goods can also be calculated with high accuracy. Variable cost involved the business can be cited and parameters can be set. With percentage change range of variable cost we can effectively calculate the cost per unit of the production. Manually by doing so takes a lot of time along with that there are changes of making mistakes in calculation.

When we have a pre set value of the risk factors in cost identification, we can set its range value. Variable cost range and approximation can be obtained. These are the root in deciding the cost of the product. Production management ERP not only helps in identification of cost of product but also reduces the risk involved in the process. The amount of budget we have can be used to know per unit cost. Other parameters can be analyzed by knowing variable cost involved.

Conclusion

From procurement of raw material to production process, various type of cost is involved. In complex production process it’s difficult to get the exact value of identification of cost per unit. With so many parameters which are both fixed and variable in nature, often managers get confused as to how to lead this process. Production management ERP gives a clear solution to this problem. Step by Step all the cost are identified and all process cost are detailed in the software. Messy looking production process can be easily fragmented into per process cost. Altogether they make a final cost of product by use of Production Management ERP.

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