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Are You Trying to Keep Your Production Costs Down?

accounting to keep production cost down

Many businesses are becoming much more involved at trying to cut their business costs.   Often the tendency is to reduce the number of workers so the payroll costs can be reduced.  This doesn’t always work out too well because there is now a shortage of workers and productivity is reduced.   Then what may happen is extra burdens are being placed on the remaining staff.   They may rebel if there is no increase in their wages to accommodate the extra work they are performing.   Now this results in an extra turn over of staff and hiring replacements comes with an expense.   Or, the other scenario is you end up having to pay overtime so you are really no further ahead.

Before jumping to the conclusion that the only way to cut costs is to lay off, look at some of the other production costs first.   These costs can be classified as direct and indirect costs.

An example of the direct costs would be the raw materials used in the manufacturing process as well as the labor needed for the production.   Indirect costs are the machinery and utilities for example that have to be used to keep the production going. These are the overhead costs.

Raw material reduction:

One of the first things to be looked at is the cost of the raw materials.   It could be that you chose specific suppliers when you first started out and have stuck with them for years.   Loyalty is a good thing but not if it is going to dramatically affect the production costs.   It may be time to start shopping around to see if better pricing or better replacement materials at less cost are available.

Reduce the overhead:

Take a look at your equipment and see if it is running cost effectively.   It may be that an update or even the replacement with more modern equipment is going to help reduce some of the electrical costs for operation, for example.

Overview the efficiency:

Make sure you are running efficiently in regards to the manufacturing set up.   See if there are changes that you can make that will allow an increase in production without an increase in costs.

Capitalize on your resources that are going to help you with time management.   Converse with your accountant who can help you understand the figures and finances of your business in much more detail.   This will give you a clearer picture as to where your costs are and which ones to focus on first.

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Sam Seidman, CPA, CA, LPA
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Toronto, Ontario
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