Dynamic Costing®: empower operations to impact EBITDA

One approach manufacturers can take on their journey toward Industry 4.0’s goal of continuous improvement comes from enabling transparency of the true product cost drivers and profitability analysis tools​, specifically by the implementation of Dynamic Costing™.

Traditional standard costs can be helpful when looking at certain static business lines a manufacturer produces, but as production mixes at the plant are now changing faster than ever before, using only those historical standards may be hurting the organization’s actual overall equipment effectiveness (OEE) by focusing on the “low cost product” blind to its impact on through put. Most importantly, it may even be damaging the manufacturer’s bottom line by not having a proper understanding of which products are responsible for driving profitability today.

In the recent webinar sponsored by the Original Equipment Suppliers Association (OESA), “Industry 4.0: Gauging your enterprise technology and the power of integration,” members of Baker Tilly’s supply chain and manufacturing consulting practice Peter Pearce, principal and practice leader, and Cameron Reid, director, discussed how Baker Tilly’s Dynamic Costing could help a manufacturer more reliably determine the range of its actual costs.

Depending on a manufacturer’s industry 4.0 maturity level, an organization may be able to leverage its existing information to enable Dynamic Costing. In turn, those insights can drive business results and help the organization make informed decisions in a rapid time frame.

Traditional standard costing versus Dynamic Costing

The main components of traditional standard costing are materials, labor, fixed overhead and variable overhead — but are not the only components that should be factored into a business’s costs.

The data gathered when using the standard cost accounting method is most likely aggregate averages that lags current production. Standard costing depends on snapshots of costs for a given total period in time for most of its data, which creates challenges to see within a narrower production time window. Information used in this type of costing is not updated frequently and as a result it does not provide for a clear understanding of root cause for when a cost variance occurs. Without real-time data driving the costing models, manufacturers will lose the opportunity to see the detrimental effects on plant throughput, worker efficiency and product quality.