Accountants For Manufacturing & Distribution Companies in Burlington, Oakville & Hamilton

When your manufacturing overhead has a debit balance, it means that your incurred costs are more than the standard costs. For example, if your labour is budgeted at $25 an hour and the actual cost incurred is $30 this will result in an unfavourable variance. This cost matters in the event it was not budgeted on the bidding process.

The primary costs for manufacturing businesses include:

• Cost of material
• Labour
• Overhead (e.g. Amortization, utilities, rent, supervisor salary, insurance)

Other costs can include intellectual property and software related to designing and engineering products in addition to the entire manufacturing process.

Yes, these costs may qualify for claims under the Scientific Research and Experimental Development Tax Credit (“SRED”) provided by the Canada Revenue Agency.

Standard costs are a set value that is calculated and used for the valuation of inventory components during the manufacturing process. A standard cost includes items such as direct material costs, direct labour and an allocation of manufacturing overhead. As a product is manufacturing, the standard costs at each stage are applied to the item to build up its actual calculated costs. This is a more efficient way to value manufactured items since the individual tracking of costs by project would be costly.

Yes, we have cross-border expertise and have worked with many manufacturing companies who focus on exports outside of Canada.

Manufacturing companies typically have three accounts:

• Raw materials,
• Work in progress, and
• Finished goods.

Under generally accepted accounting principles, inventory is categorized as an asset but it really is a collection of costs which, if not managed properly, can significantly impact profitability and cash flow.

Proper tracking of inventory along with its costing is critical in managing both your costs but also driving decisions related to pricing strategy. In addition, excess or old inventory is a drain on cash flow which is a critical driver in all businesses.

From an accounting point of view, direct labour is included in the cost of goods sold and, as a result, tends to be viewed as a variable cost. In reality, direct labour is becoming less and less of a variable cost compared to decades ago (or even a few years ago).

With the current state of the labour market along with employment laws, a company’s ability to adjust its direct labour costs is very limited. As a result, this cost is starting to look more and more like a fixed cost. Companies can limit their exposure to this cost through better scheduling, automation, and process improvement.

No, producing larger batches won’t always reduce your costs. Companies determine standard costing models to apply overhead costs, but in reality, your overhead doesn’t change enough. Therefore, this results in an over-absorption of costs to inventory, storage, tracking, and the possibility of writing down the value of inventory based on ageing.

Having a better handle on the cost of inventory matched with cash flow considerations may provide a better guide for manufacturing decision-making.