Unit based budgeting
In a manufacturing environment cost and revenue has to be associated with volume. Previous year's spend with inflation adjustment is only applicable if a business stands perfectly still. The raw material, product and sales mix changes. In the aspiration to grow the business' profitability, volume increase is sought after. Depending on which product line achieves the additional sales, contribution levels, profit margins & costs all change.
To enable more accuracy in the accounts and in the budgeting process, all the standards have to be accurately defined (read more about standards here) but in addition to data accuracy the connection between the driving units needs to be clear. For an example, for each kg of product a set amount of cost consumption in correlation with what has been stipulated in the standards is expected. A complex product, which requires more labour will consume more overheads. Every employee has PPE, uses water, soap and sanitiser for handwashing, uses the facilities etc.
All the various elements of costs should be connected, so there is a red thread from the product, through the costs and to the customer. More over, the budgeting should be a part of the continuous improvement program, so all the details from yield and labour management progress flows back into the accounts in preparation for an adjustment of the standards at the beginning of the new fiscal year.
AFSI can help you make the sense of what units drive which costs in your business.