By Eric Brisbon

Each review of your P&L normally highlights two of the larger numbers, with burden absorption and manufacturing variance leading the parade.  Many companies have specific goals on burden absorption for its direct impact.  We all know that with each part we make or assemble a small amount of our monthly overhead (burden) is “absorbed” or paid for by that part.  Consequently, the more parts we make the more absorption we get and profit goes up.  Remember it goes right to the bottom line which is why it is usually tracked so closely.  Another large number on the sheet is manufacturing variance.  But what is it?

Most manufacturing companies use a standard cost system.  The prime reason is that this gives you a set number of a product that isn’t changing each month.  If an actual cost system is issued, things get very hard to manage as everything is a moving target.  But there is a bigger reason.

When a standard cost is set, the cost of material or service is received from your supplier and set as part of the material standard.  Similarly, some engineer goes out at a machine or assembly station with a stopwatch and measures how long it takes to make or assemble and test a part.  That is the labor standard.  Then an account determines how much overhead will be applied to that labor (the absorption number) and voila…. you have a standard cost (Material, Labor and Burden).  This becomes the set value of the part for inventory.  We also know that the sales number minus the standard cost is gross margin.  Heck that was easy.

But in reality it’s not that simple.  Life is dynamic. Suppliers change costs (in some circles this is measured as PPV (purchase price variance), machines break, assembly has problems, customers make unusual requests that cost you time, tools get dull, process capability degrades, gage disappears and you have to hunt for it, routings are wrong, BOM’s are incorrect, you decide to spend 10 additional minutes in the head reading the football scores, part counts are wrong, data gets fat fingered, the list is e  n   d   l   e   s  s.

Everything outside the set standard is variance.  Consequently, over each reporting period you manage your variances since the standard is set and won’t change month to month.  This makes tracking down problems or seeing improvements much easier to determine.  And as we know, like burden absorption, each dollar saved in variance, goes right to the bottom line!

Many companies have boards in the shop is to help identify areas that are negativity impacting their variance number.  Without data, it’s hard to know what to fix.  The question becomes how are they all individually identifying items that need to be fixed and are they fixing them?