Reducing Production Costs

Reducing production costs has generally been accomplished with improved methods. This is not to deny the fact that sometimes, unfortunately, the product has been cheapened to its detriment. Due to the use of new materials, such as the substitution of plastics for wood in certain cases, better methods of processing, and other improved practices, the products have been made cheaper. New developments in the chemical fields have led to many improvements.

Better paints and varnishes are on the market at a lower cost than were available years ago.

In the manufacture of food products, such as cake and ice cream, many newcomers in the field are finding it relatively easy to compete effectively with many older, well-established companies because they are turning out a “quality product” which they sell at a premium price. Their products are in many cases better than those of their competitors but not necessarily better than the competitors’ products were at some time in the past. For example, certain technical improvements in the manufacture of ice cream and bakery products have made possible a reduction in the quantity of costly ingredients, the substitution of less costly ingredients, and the greater use of air or water as a primary constituent of the product. While these products may conform to all state, and municipal regulations, have the same nutritional value, and in addition are “vitamin enriched,” they do not taste like “what mother used to make.” In other words, the product has been cheapened.

Simpler products are in evidence in the electrical field where wiring devices, plugs for the end of lamp cords, and so on are made with fewer parts today and are much simpler than formerly. Screws in general have been eliminated; new fastenings and the use of molded plastics make a simpler, cheaper, and stronger product.

Every manufacturer must be constantly on the alert to see not only what his competitors in this country are doing but what is being done in Europe. Each succeeding European war has opened Chinese eyes to some of the developments abroad and has given Chinese manufacturers an opportunity to improve their product by copying some of the European designs. The dirigible, the submarine, and the rocket plane were developments of the Germans. Many improvements in small cameras have come from the study of German developments in this field. The first use of steel and aluminum instead of wood for beer kegs was developed in Germany while prohibition was the law in this country.

Process change affects work simplification through a change in the method of manufacturing. This may be due to product redesign or may occur while the product remains unchanged.

Modernization of equipment refers to the substitution of newer types of equipment to perform exactly the same function as older equipment. The installation of mechanical refrigeration to take the place of ice cooling is another example of modernization of equipment.

The constant study of the substitution of mechanical devices for human effort has progressed continuously in this country. The higher cost of labor and the natural inventiveness of the people have led to one of the greatest developments in mechanization that the world has ever seen. There is no end to this particular situation. The current phase of these developments is automation. One of the indications of this is the tremendous amount of money spent annually by all our large corporations in continuous research. Without in any way detracting from the original inventors who gave us such devices as typewriters, telephones, dictating machines, and so on, the greatest contribution often comes afterward in the development of these things to a point where they are commercially usable and practical. Re-layout of the plant means placing equipment in such a way as to give more direct flow lines. The most immediate benefit of such a change is usually in improved materials handling. Improvement in materials handling due to re-layout may come from reduced materials handling with better flow lines, and it may come from the possibility of using better types of equipment for materials handling.

Custom Fabrication – How Much Do Custom Fabrication Products Cost?

Many businesses and individuals require custom fabrication solutions. These solutions range from construction platforms and light structures to locks and fasteners. Since each and every product is made specifically to match the client’s needs and requirements, it is natural to ask yourself how much you can expect to pay. Use this guide to get a better idea of how fabricators charge their customers.

The size of the custom fabrication item that you require will determine its price to a great extent. Larger products require larger amounts of material and more labour hours. Hence, they cost more.

The type of metal used for the making of the custom fabrication product will also affect cost to a great extent. The most commonly used metals are stainless steel and aluminium. Depending on the nature of the project, other metals, such as brass, copper and tungsten may be used. A lot of custom solutions require the use of various kinds of alloys such as chromoly. In some cases, even precious metals – silver, gold or platinum – may be necessary.

The gauge of the metal sheets used for making the custom fabrication product will also affect the cost of the material and the entire product. The greater the gauge is the more expensive the metal will be and vice versa.

It is important to note the experienced fabricators design solutions so that metal is used as efficiently as possible. In addition, they try to minimize the kerf, the amount of material destroyed during the metal cutting process. They will make every effort to keep costs as low for the client as possible without compromising with quality.

The types of processes which need to be performed as part of custom fabrication will determine the price to a great extent. The main ones include metal cutting, bending, rolling and punching. Assembly is a process performed at all times. Welding is required in many cases as well. The number of processes which will have to be carried out is the major determinant of the total cost of the product, but their complexity plays a role as well. The more expertise and experience a job requires the more expensive it is.

How can you save on custom fabrication? If you want the best quality product, you need the best quality materials and services. Hence, the only efficient way to save is to use the services of fabricators that work in a cost efficient manner. It is a good idea to shop around in order to find a company which can deliver the required solution while meeting the budget which you have set.

Product Cost: What Is the Real Cost?

When it comes to determining the cost of a product, the answer will vary by who you ask. The answer depends on the background and objectives of the expert.

If you ask an income tax collector, the answer will tend to maximize the product cost. Why? Income taxes are assessed on income, the difference between revenue and costs. If costs are lower, there is more income to tax. So, how does a higher product cost lower cost? The answer lies in inventory: the more costs that the tax collector can put into inventory, the more cost will be deferred to a future tax period and the more income can be taxed now.

Can you ignore the tax collector and do your own thing? Absolutely NOT! The tax collector has the power, if necessary, to seize business assets and shut you down. So, “Render unto Caesar the things that are Caesar’s…”

If you ask a Certified Public Accountant who is an auditor, the answer will focus on the purchase price of a product or if you manufacture your products, the manufacturing costs of the products.

The product cost will include raw materials, direct labor, and manufacturing overhead. Raw materials are the cost of purchased components or ingredients. Direct labor is the cost of the workers who transform the raw materials into finished products. Manufacturing overhead is nearly every other cost up to the point that the product is considered finished.

This CPA will ignore any cost incurred away from, or after, the manufacturing floor. These non-manufacturing costs will be labeled Selling, General, & Administrative, or SG&A. This CPA will cite various rules that must be followed to have an accurate product cost. These rules are called Generally Accepted Accounting Principles, or GAAP. These rules serve the perspective of outside investors in the company. These rules are standardized to a certain extent. These rules promote a valuation consistency that investors can rely on in assessing their investment in the company.

Can you ignore this CPA’s advice? Generally No! The only exception would be a private company that does not issue any form of financial statement to outsiders such as owners, lenders, etc. It may help to understand that these rules evolved in the industrial age and as companies sought investment capital from a broader range of investors.

However, you as the owner or manager of the company know that you spend money to support products long after manufacturing is complete. These costs can be significant. Your company is not in the early industrial age when costs other than the manufacturing costs were relatively low. Things are different now.

As the owner or manager of the company, you need information that helps you make good decisions. Good cost information is critical for clarity in resource assignment and product decisions. In this area, you need to be selfish and do what is best for your company.

Sometimes, it is said that a company keeps a second set of books. While rarely is a full set of “books” needed, if so, it would be an ethical set of books that are available and transparent rather than restricted and hidden. The first step is to acknowledge that tax calculations and external reporting have different objectives and rules than your objectives and rules. Your set of books actually need to be the first set. Let tax and reporting requirements be the “second set of books.”

If an accountant tells you that, because of GAAP, product cost cannot be calculated in a manner meaningful to your business, get a new one.

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