A medium-sized Swiss producer of cosmetics for supermarkets and drugstore chains had high fixed costs for machinery and building facilities. In a market with very tight margins, the profitability of production was under serious threat. In order to gain more transparency about the details of the value chain, the company introduced a new ERP system. The current interim manager was tasked with completely rebuilding the value flow postings in the ERP system, including a transparent marginal cost calculation up to the sales price.
Analysis of cost behavior and identification of differentiated cost drivers
The calculated manufacturing costs were not very reliable in the previous system, as only direct costs and an overhead surcharge accumulating over the production stages were taken into account. The interim manager quickly realized that the company needed to know the marginal costs for the individual products in addition to the full costs in order to be able to reliably estimate the profitability of orders.
In order to arrive at realistic cost estimates, the interim manager, in consultation with the department heads, identified values per "cost centre cost type" for the first time and classified them into the categories "variable", "fixed" and "leap-fixed" in relation to the production quantity. This made it possible to identify differentiated cost drivers.
Simulation calculations created for multi-level costing of product types
Based on the standard functionalities of the ERP system (bill of materials, operation plan steps, overhead types, hourly rates), the interim manager compiled costing model variants for the various overheads, setup costs and direct material and personnel costs in Excel using specific products. Within six weeks, meaningful costing models were created for ten key products with a clear distinction between fixed and variable costs.
Costing models extended to other products according to the 80/20 rule
After the costing models had been approved by the management and authorized by the Group, the interim manager developed the models further. Applying the costing model to the more important products according to the 80/20 rule made it possible to check the (un)absorbed overheads when applying the costing to the entire company. In addition, extended analyses of "gross margins to full costs" and "fixed cost recovery contributions" per customer were possible.
This step paved the way for setting up the account controls for the value flows and entering the production plan steps, item BOMs and resources in Microsoft Dynamics 365 for Finance and Operations.
Costing extended to include cost of goods sold and linked to sales costing
Building on the full and marginal costing defined in the ERP system, the interim manager implemented the "Flexicalc" add-on module from Microsoft Dynamics 365 for Finance and Operations. This module enables production costing to be extended to cost price and a differentiated allocation of development, sales processing and administration overheads to the (customer-specific) items.
After calculating all item cost price calculations in the ERP system, the interim manager supported the sales and business manager with regard to the measures to be taken for each customer (e.g. negotiating prices and batch sizes).
New ERP system enables profitable price calculation
After a good seven months, the interim manager successfully completed the introduction of the new ERP system. With full and marginal costing down to the cost price, the sales department was able to determine the gross margins and fixed cost recovery contributions for every order in every batch size for the first time. This quickly had a very positive effect on the economic situation: The company returned to profitable financial figures.
