![]() Basic CostingĪs Bob approached the table at the diner, he saw Phil was sitting with someone. Deep down Bob felt a bit anxious but also hopeful that he would discover the insights he so desperately needed. Faced with new challenges, Bob sought insight from someone he trusted-and so he arranged another meeting with Phil.īob was headed to the meeting now and Phil was bringing someone he thought could be of help. They eventually determined they needed to create a product costing system that reflected the restructured business. This common method isn’t so common in the smallest of job shops, but for a growing manufacturer, it’s essential. To find the applied cost in activity-based costing, a shop simply takes an hourly rate and multiplies it by the labor hours used. This was risky, especially because of all the costly new processes planned. Over time the business started the practice of allocating overhead to labor hours, but often they could not fully grasp how well they did on an individual part basis. At its beginning, the business took an informal, back-of-the-napkin approach, and for the most part it worked OK. In light of these margin issues, Bob and the comptroller began looking at the books and the company’s existing costing practices. And because of his concern over managing the finances of this more complex business, he had already hired a financial comptroller. He had started the search for an operations manager who would take over some of his prior duties. Given the expected size of the workforce by year-end, Bob planned to hire more floor leaders and office staff. All that would only add to the profit margin challenges. New processes would require new expertise, which would mean hiring new staff and technical leaders. Still, new equipment and processes would bring their own financial challenges, beginning with higher operating costs from the payments plus the additional operating and consumable costs. ![]() Also, if the numbers worked out, the bank was open to providing equipment financing or capital lease arrangements. Fortunately, initial make/buy cost assessments showed that if new equipment were purchased, then these margin losses could be recouped. Higher-than-planned outsourcing costs were affecting margins. The products also included various machined shafts and hubs as part of the weldments, and the fab shop’s machining supplier had trouble delivering on schedule. Even worse, the product quality and finish expectations were a stretch for the process capabilities of their plasma cutting table, so they had to outsource the plate parts to a laser cutting subcontractor. ![]() The company hired more people, but many weren’t fully contributing yet. Initial orders from the new contract had already started, and the shop was struggling on many fronts. He felt like he had jumped from the frying pan into the fire. And the initial decision to take on the new project was much simpler than the reality of making it happen. (Editor’s note: See “How a welder becomes a leader” from the March 2019 edition, archived at Bob didn’t embrace his new role easily. At that initial meeting Phil challenged Bob to step up and accept a new role as a business leader and take on this business opportunity. A Busy Few Monthsįour months previously Bob had a long conversation with Phil Monroe, a CEO of another, much larger manufacturing company, and fellow hockey dad. The impact of all these new employees and operating and equipment investments weighed heavily on his mind. ![]() The facility was large enough to handle the growth, but he still would need to make some infrastructure investments. He had recently won a new contract that could either quadruple his fab shop’s revenue-or kill it.ĭue to unforeseen process limitations in his shop, the required investments in new equipment had grown to $2 million, and an increase in operating expenses came with it. Bob Cramer felt like he was in over his head. ![]()
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