This Accounting Method Can Make You More Profitable
Editor’s Note: A recent SBC Industry News article covered the basics of income statements, or profit and loss (P&L) statements for some, and broke them down by their various types, sections and frequency.
Managerial accounting is a form of cost accounting that identifies, measures, analyzes, interprets and communicates key information to management for a specific operating area or division.
Component manufacturers (CMs) operate unique ventures that can be described as mass customization, with a variety of product offerings that all have similar, but different, cost centers and contribution margins. Depending on the operation, CMs can offer any one, or all, of the following [i]:
- Wood roof trusses
- Wood floor trusses
- Wood wall panels
- Cold-formed steel roof trusses
- Cold-formed steel wall panels
- Engineered wood products
2018 SBCA Financial Performance Survey
A managerial accounting approach, and more specifically managerial P&Ls, separate out each product offering to showcase how each individual product line is performing with respect to its individual costs. Are floor trusses more profitable than roof trusses? Is your operation losing money when it sells connector hardware as part of a package? How are expenses related to delivery impacting your overall bottom line? Without a P&L that separates out costs by product offering, management doesn’t specifically know what products it should produce more of and which ones it needs to work on to drive down costs.
Beyond knowing the performance of each product line or division, managerial accounting reports can help identify constraints in a particular product or production line. Analyzing a particular product P&L can offer insights into production limits and shine a light on bottlenecks that need to be addressed either through process changes, different labor appropriation, or machinery maintenance. Regularly monitoring P&Ls by product can also offer insight into how labor is performing over a specific time period. If a crew is down members, has had recent turnover, or is simply not performing as well as it should, the results should be evident in the product’s P&L.
Once production levels have been identified, any desired changes can be made through production changes or capital expenditures. If a particular product’s production line is being held back compared to industry norms (which can be compared to SBCA’s Financial Performance Survey) or required levels to serve customer demand, investments in equipment or additional staff can be made to drive production to desired levels. Managerial P&Ls are also a baseline for applying internal rate of returns to assist management in making equipment purchasing decisions. Management can identify potential production gains from the new equipment and identify ways to finance the purchase to deliberate if the gained production exceed the financing costs. Payback periods can also be identified in the costing analysis to help understand the long term impact of decisions.
Separating product lines is just one example of a managerial accounting approach CMs can take to better understand costs within their operation. Once a CM has a familiarity with managerial reports, further tweaks and adjustments can help CMs better understand how an individual production line or individual job compare to others and where improvement opportunities exist for a better operation. The beauty in managerial accounting is the flexibility it allows to creatively develop tools to expose insights and better understand operations to drill down to very specific details that can have a huge impact on overall operations.
SBCA is offering Business Solutions Groups (BSG) geared specifically to expense management and understanding P&L statements. If you are interested in participating in one of these BSGs please contact email@example.com.
[i] Derived from SBCA’s Financial Performance Survey