Management team meets to review benefits of Dynamic Costing™ analytics

Dynamic Costing™

With a Dynamic Costing™ approach, manufacturers understand and have visibility to true product cost data, and move from standard cost accounting to cost management analytics.

Standard Costing versus Dynamic Costing™

The main components of traditional standard costing — labor, materials, fixed overhead and variable overhead — only tell part of the story when it comes to determining the true cost of a product. It leaves out several contributing elements that should factor into your business’s actual costs. The standard costing approach may even be damaging a manufacturer’s bottom line by not having a proper understanding of which products are responsible for driving profitability today.

Enable transparency of product cost drivers

Baker Tilly’s manufacturing analytic and financial services professionals enable transparency of manufacturers’ true product cost drivers with the Dynamic Costing approach. As your organization progresses through its Industry 4.0 journey and goal toward continuous improvement, we leverage Dynamic Costing to reassess your data and provide real-time information to drive business results.

Dynamic Costing measures daily reality: the real individuals and labor that are touching the product. This encompasses material consumption – what’s truly going into the product; real overhead and asset utilization; environmental factors; quality; scrap; and micro events that are tied to assets. All of these tap into integration and automation and try to minimize the manual effort of collecting and managing data to help monitor the business.

Factors Dynamic Costing™ helps you track

To move toward Dynamic Costing, companies will need some tools which are “enablers” of Industry 4.0. Data analytics is one “enabler” that will provide manufacturers with statistically meaningful information. With proper integration, manufacturers can have improved transparency among departments; data accuracy, with reduced errors and time dedicated to manual processes; real-time data gives stakeholders access to critical data in one place whenever they need it; and automation, which eliminates redundancies and increases efficiencies.

A five-step Dynamic Costing™ road map

The 5 step Dynamic Costing™ road map to execution within the Industry 4.0 environment

Dynamic Costing Step 1: Planning

Identify business objectives. Having an Industry 4.0 structure in place provides flexibility and allows you to rapidly change its business objectives and make appropriate decisions.

  • Define business objectives (solving for)
    - Throughput
    - Cost
    - Max profit
    - Plant consolidation
    - Expansion
    - Survival
    - Lowest cost provider
    - Minimum capital expenditure
    - Other depending on circumstances
  • Assess systems and infrastructure
    - Software: ERP, MES, SCADA, databases, third party, etc.
    - Staff: ERP/MES/SCADA/IT/OT/PLC/maintenance
  • Assess organizational culture and potential

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Dynamic Costing Step 2: Gather data and analyze operations

Understand the true source of your data to make decisions.

  • Document available data sources
  • Internal
    - Spreadsheets
    - ERP
    - MES
    - Financial systems/GL
  • External
    - Payroll
    - Third-party logistics
  • Hardware: PLCs, HMIs, scales, robots, calipers, torque tools, controllers, etc.
  • Review engineering master data (BOMs, routings, PFDs, work centers)
  • Determine level of integration

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Dynamic Costing Step 3: Build program to assimilate information

Build an application for assessing information and put necessary controls and technology in place to ensure movement along the continuum of Industry 4.0 is sustainable.

  • Map core data elements to support identified business objectives
  • Define analytic workflow (Extract Transform Load) tools
    - Define process flow
    - Define data flow
  • Develop integration maps (if using integration system)
  • Deploy costing analytic framework and associated models

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Dynamic Costing Step 4: Implement and validate against business objectives

Continually validate against the business objectives. Don't put them on the back burner. Ensure the solution put in place supports the organization.

  • Validate sample costing project in order to achieve confidence with comprehensive top down view on system extracts through Dynamic Costing
  • Assign a dedicated project champion
  • Review results against business objectives
  • Perform root cause analysis to determine continuous improvement plan
  • Communicate and open the door for feedback
  • Demonstrate the benefits to team members
    - Involve end users in testing and incorporate them in solution design

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Dynamic Costing Step 5: Institutionalize Dynamic Costing

Define and implement processes and procedures to make the institutionalization and continuous improvement aspect of this a reality. Revisit improvements.

  • Deploy a solution set to link enterprise consumption of data into an automated costing framework pulling from:
    - Plant floor equipment
    - Engineering and maintenance systems
    - External market costs
    - Finance
    - Purchasing
    - Payroll
  • Implement procedures and processes to follow costing framework
  • Establish business metric thresholds – determine acceptable outliers
  • Incorporate costing results into enhanced client estimating processes (cost plus)
  • Update master data sets reflective to current business strategies
  • Deploy “what-if” scenarios

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Measure reality in your facility

The Dynamic Costing™ approach equips organizations to collect and analyze data daily to make decisions rapidly and continuously over time. Through Industry 4.0, integration of shop machinery to back-end systems, manufacturers have real-time information at their fingertips.  

With Dynamic Costing, an organization moves from cost accounting to cost management analytics, which brings everyone into the equation (i.e., engineering, purchasing, operations, etc.) when determining the true cost of a product.  

Is your organization ready  to be responsive to market changes by using real-time information with Dynamic Costing?