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Re-evaluating foundry costs: the key to survival.

If process cost data is off the mark by even the slightest of margins, your foundry could be headed for a brick wall.

Accurate knowledge and use of your foundry's operating cost structure are the most important factors in acquiring profitable new work.

All improvements put into place for quality, on-time shipments and quick response are meaningless if the price quote isn't competitive. The primary impact occurs at the beginning of the foundry activities--the cost estimate and the subsequent price quote.

If process cost factors on which the cost estimate depends are incorrect or aren't detailed enough to accurately represent all the complex variables in the foundry process, or if the cost estimating procedures are outdated, then the quoted price will only be an approximation of the true cost of delivering the casting to the customer's receiving dock.

If this is the case, there is a high probability that simple or "good" jobs will be overpriced, and the complex or "bad" jobs will be underpriced.

This first step determines the foundry's basic profitability because the top 10-20% of the pattern numbers produced determines the profit "ballpark" for the foundry. No amount of changes by management can overcome the inadequacies built into the first activity.

Symptoms of inadequate use of cost structure data usually show up over a one- to two-year period. These include:

* Expected bottom line results from staff and work force reductions do not occur;

* The foundry is operating at high-level capacity but just breaks even or is marginally profitable or unprofitable;

* Price quotes include a 15-30% profit add-on, but the operating results are less;

* Price quotes include a 10% scrap allowance but the shop is operating at 6-7% and the profit objective still is not reached.

Another big problem that can occur is that the product mix will slowly change to a higher proportion of castings TABULAR DATA OMITTED that are being subsidized by the "good" castings.

New work obtained will be less desirable compared to the foundry's traditional product mix. This could mean producing castings with high cores or with increased core finishing and/or assembly, lower weight and increased finishing.

The desirable work you already have will be pulled, leaving you with less "good" work to subsidize the "bad" work.

For a captive shop, a classic case is purchasing department officials looking like heroes by "cherry picking" the product mix, which, of course, results in a higher average cost for what is left.

The key to profitable casting pricing is understanding your foundry's cost structure and the various cost bases (direct labor hours are not appropriate for all of the foundry processes) and then applying only the costs that a specific casting incurs.

Keeping the cost structure current isn't a simple task, however, because of the complexity of foundry processes and their many variables, an ever-changing product mix and the changing of processes.

Each casting quote should only include the casting's processing costs. All costs associated with processes not required by the casting should be excluded.

Revise the Profit/Loss

One of the first activities to perform starts with the financial reports. Although these reports are necessary TABULAR DATA OMITTED for financial and tax purposes, they are inadequate for operating cost analysis.

The first step is to eliminate all revenue and costs that aren't directly related to making castings. These types of costs include pattern shop work, commissions and other cost items directly charged to the customer. It is recommended that a "mini" profit and loss analysis (P&L) be conducted for each cost item pulled out to ensure that the foundry is not losing money on these items.

Table 1 demonstrates the results when the pattern shop costs are pulled. The pattern shop is losing money and the profitability of the foundry process is actually $147,000 higher than initially shown.

After these revenues and costs are pulled, what is left is the "value added revenue" (VAR) that the foundry is being paid to cover the costs of the foundry TABULAR DATA OMITTED processes. Once the VAR level has been developed, start breaking down the revenue and costs by whatever is logical for your foundry--such as metal type, molding areas and product mix categories.

Table 2 shows such an analysis by metal type. The revenue from ductile iron is 2.5 times greater than the revenue from gray iron. Ductile iron, however, provides only $17.24/ton of profit compared to $82.53/ton from gray iron.

Table 3 shows an analysis by molding area. Although the foundry is profitable, the analysis shows the pallet line is losing money. The floor molding line's profits are subsidizing the pallet line.
Table 4. Redistribution Analysis for Maintenance Costs
Maintenance Analysis
 Labor ($) Material ($) Total ($)
Shell Core 25,000 22,000 47,000
Pallet Line 213,000 184,000 397,000
Floor 60,000 83,000 143,000
Cutoff 10,000 5000 15,000
Stand Grind 12,000 14,000 26,000
Swing Grind 8000 6000 14,000
Department Totals 328,000 314,000 642,000
Other 476,000 503,000 979,000
Total 804,000 817,000 1,621,000
Table 5. Fringe Benefits Based on Direct Labor
Fringe Benefits
 Actual % Corrected %
Melt 57,998 6.9% 70,200 8.3%
Mold 278,978 33% 342,600 40.5%
Core 152,240 18% 119,300 14.1%
Finish 356,784 42.2% 313,900 37.0
 846,000 100% 846,000 100%
Table 6. Fringe Benefits Based on Indirect Labor
Fringe Benefits
 Actual % Corrected %
Melt 115,996 6.9% 90,373 5.4%
Mold 697,445 41.5% 750,095 44.7%
Core 152,240 9.1% 99,290 5.9%
Finish 713,568 42.5% 739,491 44%
 1,679,249 100% 1,679,249 100%

Performing these revisions or restatements of the financial reports can be a Herculean task, which explains why it is infrequently performed. After the first time, however, subsequent and monthly processing can become almost automatic through a revision of the chart of accounts. A detailed chart of accounts based on the cost accounting requirements of the process as well as the financial and organizational requirements will facilitate the necessary analysis.

Redistributing Indirect Costs

Although accounting systems vary, a two-step closing process is recommended to provide key detail data along with clearing transactions that transfer the costs back to where they incurred. Table 4 displays a redistribution analysis for maintenance costs. The total maintenance cost of $1,621,000 is shown with the back charging of $642,000 to the operating departments. This leaves $979,000 to be allocated as general costs across the foundry operation.

Using a two-step process also facilitates other types of cost redistributions. For example, it's not unusual to find TABULAR DATA OMITTED hourly fringe benefits appearing in general shop manufacturing overhead costs. If the basis of distributing this cost is on direct labor, then a distortion occurs, as shown in Table 5.

Redistributing the fringe benefits based on total labor (direct, indirect, maintenance, etc.) yields a more accurate cost of running each process area. While the difference in percentages of fringe benefits assigned to the operating departments does not show dramatic changes, the dollar impact can be substantial. Table 6 shows the differences when indirect labor is assigned to the operation that benefits from the labor.

Another area where costs are frequently assigned incorrectly is in the distribution of the cost of running the green sand system. The original distribution (based on direct labor hours some years ago under a different operating mode) had the squeezer molding line picking up 16.6% of the cost of operating the green sand system.

If the cost distribution is based on molds made, this would drop to 1.3%. Mold volume, however, is a more accurate cost distribution base because direct labor hours of molding or the number of molds produced have little correlation to the quantity of green sand that was prepared and consumed. When mold volume is used, the squeezer area only needs to absorb 0.7% of the cost of operating the sand system.

Changes in the product mix can be a significant factor in how the cost-estimating structure should be set up. A foundry running Disamatics was asked to quote on a mix of work that would have added a machine shift to the workload. The characteristics of the present and new mix are shown in Table 8. It was obvious that using the present cost-estimating factors and structure would result in underpricing the work.

Table 9 also shows the revision for the melting and molding that was developed. It separated the costs into the modern casting/April 1993 cost/hour to cover having the melting and molding capability in place and operating, and the cost/lb of hot metal delivered to the molding line to cover the cost of melting (electricity, refractory, ferroalloys, etc.) and molding (green sand bond materials).
Table 8. Changes In Product Mix
Casting Data
 Present New
Casting Weight 10.5 0.490
Quantity in Mold 2 6
Casting Weight in Mold 21 2.9
Mold Yield 55% 49%
Mold Poured Weight 38.2 6
Molds per Hour 260 260
Mins/Casting 0.1150 0.0380

The adjusted procedure sets costs of melting and molding operations by using a cost/lb of pour weight plus a cost/hour to run the melt and molding areas. The cost of the present casting mix stayed essentially the same at $1.51-1.52 per casting. The adjusted procedure, however, resulted in a 13.5% higher cost for the new product mix (from $0.267-$0.303 per casting).

Know Your Costs

Detailed knowledge of your operating costs, knowing where they are, and using that knowledge to control costs and bid on new work will improve your foundry's profitability and survivability.
Table 9. Revisions for Melting & Molding
Cost Calculation Data
 Original Adjusted
$/OPN Hour -- 127.5770
$/lb poured 0.0439 0.0314
$/OPN Hour 352.9370 292.5920
$/lb poured -- 0.0059

Obtaining this detail knowledge requires:

* A restatement of the financial reports to exclude the revenue and cost items that are directly charged to the customer or are not related to processing the casting.

* A cost accounting staff that is knowledgeable about the foundry process, where costs are incurred and where work is performed by one area to support other areas, etc.

* A detailed chart of accounts and an accounting system in which it is easy to add accounts.

* A rigorous purging of costs from overhead and transferring them into the operating departments--not just locating them. For example, insulated riser sleeves should be pulled out of manufacturing and molding overhead and specifically charged to the job or the specific molding work center where they are consumed.

* The use of bases (pounds, total variable cost, etc.) other than direct labor hours to distribute indirect cost items.

* A periodic comparison of the actual costs and cost factors to what is used in the cost estimating process.

* Feedback from the shop as to actual cost (production and processing rates) on specific castings and comparison to the estimate or process sheet.

* Comparisons of the projected costs to produce a mix of work versus the actual cost for the specific time period.

Knowing what costs are in detail, where they are, and using that knowledge to control costs and bid on new work will improve your foundry's profitability and survival.
COPYRIGHT 1993 American Foundry Society, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Management Report: Cost Control
Author:Dallmer, Douglas
Publication:Modern Casting
Date:Apr 1, 1993
Previous Article:Building business relationships with strategic partnering.
Next Article:Expect changes in labor and employment law.

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