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Operations Manager at Optocap Ltd, UK see all my questions Any good cost models for a manufacturing start up? Getting yoru COGS correct in a start up is an interesting challenge any thoughts on how to improve on ABC ? Clarification added April 9, 2007: ABC =Activity based costing This is one method I have seen used, I thin it is complex for a start up, I hav e used others but I am interested in what other people find to wor ... The guts of the question is ta ing in to consideration all the issues with a sta rt up yield cycles, capacity under utilization ,high material costs, manpower le arning curves, how do you come to a realistic COGS, to support the ASP... posted April 9, 2007 in Accounting, Manufacturing | Closed Share This Question del.icio.us Permalin : To lin to this question from your blog or site, copy and paste the U RL below. Share This Good Answers (7) Rhett F. PhD Research: International Development and Policy Economics (U. of Illinois) see all my answers Best Answers in: Accounting (1), Manufacturing (1) This was selected as Best Answer I have wor ed extensively with ABC systems in a mid-size manufacturing company. From my experience and understanding, activty based costing is not generally des igned as a means to arrive at the accounting definition of COGS; for this purpos e I would agree with others that establishing product cost standards is probably the simpler way to go. However, ABC can be a useful tool for evaluating the per formance of processes within a business. If you envision your business as a collection of processes necessary to bring yo ur product to mar et, ABC can be a useful management tool. Basically, you have s ome products, and wor ing bac wards, some inputs (time, people, and equipment) n ecessary to manufacture, sell, and deliver these products to customers. You prob ably already now the details of this whole process; ABC is simply a means of as signing costs to these details. Using traditional methods li e cost standards gi ves you a good idea of process performance for direct costs li e materials and d irect labor, but it may not give you a very good idea about other costs typicall y considered overhead. This includes manufacturing overhead for things li e mach ine use as well as other costs typically considered administrative, such as sale s and mar eting. One benefit of ABC, then, is its ability to allow for different levels of resource consumption between different products and different custome

rs, which ultimately should allow management to identify and improve costly (ind irect) processes. Even if every process is not tied directly to a product or cus tomer, you may still get some benefit from measuring the cost of an administrati ve process. For example, by nowing the cost of "invoice processing", you may de termine whether this activity could be profitably outsourced. Some considerations: If you only have 1 product, then it is pretty clear which product generates the costs. ABC might still be used for process improvement, but this type of quantit ative analysis may be over ill in a smaller business where you already have a pr etty good idea of how the processes wor . If you sell a commodity, then you really just deliver the product to mar et and should not have any differences in costs that depend on customer. ABC isn't goin g to help with customer management in this situation. There are some relatively inexpensive software pac ages available to manage ABC for smaller businesses. Some pac aged software can definitely speed up ABC imple mentation, but there will be a substantial investment in setting up the processe s in an ABC system. In a new business where processes are expected to change rap idly, the cost of maintaining the system (not the software itself) may be prohib itive. If you sell customized products, ABC can be useful in estimating and measuring t he profitability of customizations and customers. In this situation, ABC may hel p with pricing by determining the true process costs of specific customizations (or, better yet, to determine if you should sell at a certain price). Extra reve nue is great, but it still needs to exceed cost either now or some time in the f uture, and ABC can provide a basis for that analysis. Bottom line - ABC is a management tool, not a costing tool. If you intend to man age your whole business in terms of processes, then ABC can help measure the per formance of those processes. If not, ABC is just going to be another overhead co st. If you are primarily concered with direct costs, you don't need ABC. You cou ld, however, start with a simple ABC model that captures only direct costs and t hen add to it later. This gives essentially the same result as a standard cost s ystem (and probably requires about the same amount of software.) posted April 10, 2007 Jim B. Product Line Mar eting Manager, Non-isolated Power Solutions Product Line at Tex as Instruments see all my answers Best Answers in: Business Development (2), Starting Up (2), Corporate Debt (1), Staffing and Recruiting (1), Public Relations (1), Change Management (1), Organi zational Development (1), Manufacturing (1), Ethics (1), Software Development (1 ), Using Lin edIn (1) as a start up there is one thing you can be sure of regarding COGS. It is higher than your more established competitors. You don't have the volume to optimize e conomy of scale. Your yeild will be lower. Your manufacturing partners are ta in g ris and your costed BOM will be higher until you go through some cycles of le arning and stabilize. Your activities to support the product are also much highe r because the company is on a steep learning curve. There is more engineering su pport, customer support, mar eting support, sales support, etc. required in thes e early stages. Expect low or no gross margins in these early stages.

By ABC do you mean activities based costing? This is an interesting costing meth od. I've had experience with it in more established companies where the BOM dire ct materials and labor are stable. It is a tool to capture the other support act ivities on a per-product basis. Is this really valuable for a startup? It might be adding a layer of complexity for accounting in a startup which typically rely on spreadsheets for trac ing things and don't have expensive ABC based ERP syst ems in place. Clarification added April 9, 2007: Your clarification states that you want accurate COGS to support the ASPs. Never let a GM target set your ASP. It is a guideline only, If you target 35% GM then as a startup you will be priced above your competition. But what if the value o f your product can bring 400% GM? What if the mar et dictates ASP? Pricing shoul d capture value. If you're in a commodity mar et then you will survive because y ou've made a brea through on cost. If your highly differentiated you've made a b rea through on value. Either way, first comes ASP that the mar et will support. Then comes GM estimates based on the usual corporate accounting methods. At the end of the day the blended GM and PFO are the important factors. posted April 9, 2007 A htar K. Gas Stations and Convenience Stores at confidential see all my answers Best Answers in: Accounting (3), Using Lin edIn (3), Mergers and Acquisitions ), Government Policy (2), Commercial Real Estate (1), Mentoring (1), Auditing ), Economics (1), Financial Regulation (1), Ris Management (1), Staffing and cruiting (1), Exporting/Importing (1), Business Development (1), Currency Mar s (1), Career Management (1), Professional Networ ing (1), Wireless (1) I am a firm believer that standard costs are the most convenient and best. Spend time once, to establish what are the components of your cost to produce, t he price per unit of the component, and what quantity/time it ta es. Then do a c alculation for standard material, labour and overhead it ta es to manufacture 1, 10 or 100 units (depending on the size and cost). That becomes your cost per un it or lot. Forget the actuals, and just record the standard times the units/lots produced per day. At the end of the month, analyse the variances, and try to rectify whatever nega tive variances can be rectified. Do not change standards in the middle of the ye ar, unless it is a major change, and is permanent. posted April 9, 2007 John D. Entrepreneur see all my answers want a good way to loo at this read about the theory of constraints, start with 'THE GOAL: by Eli Goldratt.... There is inherit danager in trying to apply classic accounting to startups. In m y humble opinion, establish the total cost burn for the next 18 months, then set a wor ing capital requirement. In my experience you need to focus on your total costs, not your COGS. ABC for a (2 (1 Re et

startup, especially, is a DISASTER. Some may argue that you need to get a handle on your costs to drive pricing. Tha t is not true. Your value proposition to customers needs to dictate your pricing . Mar ets set prices not accountants. Pricing and demand drive costs, not the other way around. To establish costs and capital requirements...use three basic measures, Throughp ut, Inventory and Operating Expenses. Theory of Constraints, provide very precis e definitions of these...use them just as precisely and your off to the races. Lin s:

http://www.goldratt.com/ posted April 9, 2007 Paul B. Strategic Planning Professional with Entrepreneurial and Consulting Bac ground see all my answers Best Answers in: Organizational Development (2), Travel Tools (1), Staffing and Recruiting (1)

I would recommend that you become a student of your businesses operations. Start by examining it from a third-party perspective. This can be hard, but it is imp ortant to gather the perspective on what exactly it is that you do. What are the ey inputs? How are they transferred, stored, used? What exactly is your produc tion process? Really in the end, no model is going to do the job entirely. You will eventually veer off the map and be in uncharted territory. Once this happens, you will be using a round peg when you have a square hole. The better you understand your bu siness, the better you measure its operations. I hope this helps! Lin s:

http://www.score.org/manufacturers_resources.html http://www.stanford.edu/class/msande273/ posted April 10, 2007 Anil W. Partner at Quadraco & High Perform Management Solutions see all my answers Best Answers in: Occupational Training (1), Staffing and Recruiting (1), Exporti ng/Importing (1), Advertising (1), Organizational Development (1) Forget ABC for the start up environment. I have been using ABC and related appro aches for the last thirty years and it does not wor for start ups. Ta e a more pragmatic approach....

I am not a seasoned expert on the topic, but I have spent many all-nighters wor ing out these details for my clients and my own businesses.

Generally, you would have done several ris based scenarios to wor out what the business is going to loo li e in the future. So you should already have a reas onable idea about your brea even points, manufacturing capacity, sales volume g rowth etc. I li e to set a point in the future where my initial capacity is used to its max imum, after ta ing account of downtime etc etc, and reflect my fixed manufacturi ng costs at that point bac to the start, which means that my COGS will change p eriod by period, untill the next increment to my capacity is required, and so on untill I am at a steady state. The value of this approach is that I do not undercost my product on an actual ba sis and will not therefore overestimate the amount of free cash my business is c apable of generating in the early period, when cash is probably the most importa nt resource that I need to manage. Feel free to contact me directly for a more detailed discussion... posted April 11, 2007 Ramesh N. Seasoned Finance Systems Professional see all my answers Best Answers in: Bond Mar ets (1) One of the simple model for a startup company would be Standard Costing. The pre cision of the standards shall be revised over the period by comparing the actual s with the standard on periodical basis and by analyzing the variances. Activity Based Costing requires a good categorization of your cost split by Depa rtments/Functions etc and a precise accounting of the cost/expenses. This not ne cessesarily mean you need a complex ERP System, but a lot of consideration to wh ile designing your COA (Chart of Accounts) and the associated dimensions/attribu tes attached with it. Regards, Ramesh Ramesh Natarajan Finance Systems Expert Dubai posted April 11, 2007 More Answers (5) John L. Experienced Quality Executive see all my answers I agree with Mr. Broiles that ABC may be a bit complex for a start-up environmen t. You can, however start building your internal processes with ABC in mind so t hat later on, you can easily implement ABC methods. Finding a good ERP for small enterprises is a challenge. Good luc . You may find that some suppliers are willing to give you competitive material pr ices because they are ma ing a bet on the come, that is, that your company will be successful. If you have an outstanding design staff or some other ey advanta

ge, you may be able to convince the suppliers to give you a brea . This is easie r if your technical staff has established relationships with the suppliers from previous experience. Your main focus, at least for 99% of the organization, should be on building rev enues. Let the CEO worry about COGS. If you can show rapid sales growth, you wil l survive. posted April 9, 2007 M. Prabha ar R. A Seasoned Techno-Commercial, New Projects Professional See ing A New Challenge w ith any Reputable Venture! see all my answers Best Answers in: Using Lin edIn (7), Professional Networ ing (3), Business Devel opment (2), Organizational Development (2), Ethics (2), Customer Service (1), Tr avel Tools (1), Freelancing and Contracting (1), Mentoring (1), Occupational Tra ining (1), Accounting (1), Corporate Debt (1), Corporate Taxes (1), Mergers and Acquisitions (1), Government Policy (1), Staffing and Recruiting (1), Exporting/ Importing (1), Manufacturing (1), Mar et Research and Definition (1), Career Man agement (1), Small Business (1), Biotech (1), Wireless (1) Dear Gordon, I all depends on the industry, mar et & geography - in which you operate. In add iton to what our friends have already said, you can do drill-down research at, http://www.google.co.in/search?hl=en&q=Best+Costing+Methods+for+a+start+up+manuf acturing+firm&btnG=Search&meta= All the best! posted April 9, 2007 Pedro R. Business Development Manager at PT PRO see all my answers Pedro R. suggests this expert on this topic: Cristina A.

regards posted April 9, 2007 Bob H. Experienced Enterprise Sales & Mar eting see all my answers Best Answers in: Lead Generation (1) I strongly second Ah tar Khan's recommendation of a standards based approach to be re-set annually. This provides greater clarity with component sourcing, helps with benchmar ing and eeps "product cost - product related" and not buried. Ot

She had implemented several ABC models in the TMT industry. She and the best way of doing it.

nows want to do

her manufactureing related costs can be handled as a burden rate and monitored a ccordingly as manufacturing capacity, etc. is expanded. posted April 9, 2007 Greg B. Mar eting/PR/public affairs strategist - I turn complex business and policy issu es into compelling stories and campaigns see all my answers Best Answers in: Public Relations (7), Business Development (5), Advertising (3) , Government Contracts (1), Internationalization and Localization (1), Internet Mar eting (1), Customer Relationship Management (1), Sales Techniques (1), Plann ing (1), Project Management (1), Branding (1), Pricing (1), Professional Organiz ations (1), Small Business (1), Databases (1), Using Lin edIn (1) Greg B. suggests this expert on this topic: Donald T. Don's held a number of leadership roles (including owner and other C-level slots ) at manufacturing and service companies; I've wor ed with him in a couple of tu rnaround situations an suspect he could bring some insight to this question.