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  • Posted by: Dante Odoni, CPA

Manufacturing Accounting Myths Explained

Every business wants to increase its bottom line and cash flow. However, many companies (especially small and medium-sized businesses) don’t know that there are nuggets of profit hidden in their accounting departments. The secret? Ditch the “cost accounting” method and focus on lean accounting.

Lean accounting is a god-send for businesses looking to increase their cash flow but is hindered by resources available, and that’s because lean accounting looks to streamline (and shorten) the order-to-ship cycle by focusing not on resources but on flow velocity.

This allows a manufacturer to focus on increasing capacity and potential revenue with the same resources as before. However, firms shy away from lean accounting because of some myths—we’re here to debunk those myths for you.


Precision Does Not Mean Accurate

There’s an issue with cost accounting where people think that entering cost value to the decimal is good for efficiency. The fact is, it usually isn’t, and the more precise it is, the further from accurate the big picture can be. Even more, GAAP doesn’t even require this practice; they simply require the materiality of whether financial information helps people make decisions. And cash flow is a better indicator of judgment than the precise amount of overhead absorbed.


Financial Reporting Shouldn’t Drive Decisions to a Tee

This comes down to an incentive issue that ends up costing a firm cash flow and other unnecessary costs. Often, as firms are ending a financial quarter, managers realize that sales are soft or lower than previous quarters. Since they cannot make orders suddenly appear, many put in large profitable orders to fluff the numbers. These orders will then bump up the sales on paper and be reconciled in the next quarter (hopefully). However, this distracts firms from their current obligations: on-time delivery, current commitments, and client relations. These practices end up throwing a wrench into the supply chain’s efficiency, creating backup and unlevel production, costing the firm. Financial decisions like these should be avoided.


General Budgeting Only Produces Costs

This might be a shock, but it’s true. Planning every dollar down to the cent for each month or quarter only hinders the entire firm. Often times, the hours and expertise of creating a general budget only end up costing the firm, as it provides little structure to the overall operations.

If the exact labor and material costs are predicted and sent to departments, they will bend and change to try to fit these numbers, often creating variances and hiccups. In order to meet budgets, new machines or updates may be put on hold, effectively hurting the bottom line or increasing labor and capital costs. It is best not to give departments tunnel-vision with general budgets as the costs of creating and adhering to them never play out.

Overall, manufacturing accounting is a tricky field, but not one that can be slimmed down and perfected. Contact us today to find out how we can assist in streamlining your manufacturing accounting processes.