Bekaert Slovakia s. r. o. is an industrial company focused on transforming steel wires and applying coating technologies in order to deliver the expected value to a broad spectrum of global customers. The branch in Slovakia was officially set opened in 2001 and this summer celebrated 15 years of service to its key customers and employment opportunities delivery to the local population, where the company has contributed strongly to bring down unemployment within the region. Currently B
Bekaert Slovakia s. r. o. is an industrial company focused on transforming steel wires and applying coating technologies in order to deliver the expected value to a broad spectrum of global customers. The branch in Slovakia was officially set opened in 2001 and this summer celebrated 15 years of service to its key customers and employment opportunities delivery to the local population, where the company has contributed strongly to bring down unemployment within the region. Currently Bekaert Slovakia s. r. o. employs more than 700 people and has a turnover of more than 100 million €, while operating in a segment of increasing competitiveness.
„Bekaert Slovakia s. r. o. began with implementation and application of variance analysis based on standard costing.“
During the summer of 2015 following the pressure from higher competition and further strive from its global customers to optimize their pricing, Bekaert Slovakia s. r. o. began with implementation and application of variance analysis based on standard costing. At that time it was already foreseen that without further application of variance analysis, it will become more and more difficult to:
A: Convince customers on validity of current prices – improve negotiation position
B: Implement improvements within the production facility at hand – improve costs
C: Optimize portfolio of products delivered on the market – improve profitability
D: Deliver the expected level of transparency in the organization – decision making
Being that Bekaert Slovakia s. r. o. produces multiple products within its main product segments and flexibility on the market has increased significantly during the past couple of years, production team faces different cost complexity from month to month. That being said blunt comparison of production costs throughout the year or even between the years has more and more lost attractiveness. Demand from customers with higher expectations and higher flexibility pressure immediately exposes the production facility to higher production costs, while in the opposite case customers with more commoditized products facilitate lower complexity of production and more optimized costs of final goods supplied.
Management of seasonality of demand has also been observed by the company as key competitive advantage. Certain availability of stock levels of finished goods being prepared to be shipped to our key customers has become a standard expectation within the competitive environment faced nowadays.
On the other side, optimization of working capital, where inventory volume is a main driver, is a must for financial health of a labor and machine intense company. Movements of inventory from month to month have also become a much more often phenomenon compared to the past – driven on one hand side by the outside market conditions and the internal stability of the organization on the other side.
For the above-mentioned reasons, it was inevitable to start with focused implementation and application of variance analysis based on standard costing in Bekaert Slovakia s. r. o. Implementation of variance analysis.
„It was inevitable to start with focused implementation and application of variance analysis based on standard costing.“
The initial set-up started with a comparison of actual production output at standard cost compared to actual costs incurred during the same period for established product cost elements. At month end, a download of finished goods output placed in final product warehouse is being taken at absolute amounts of KG per individual product within the established product segments. The standard costing card established for the period at hand is being linked via the individual product identification to the actual production output per product in order to arrive at the absolute standard cost of production for the complete portfolio of products within the segment. Certainly a good amount of detail from the costing card of individual products must be kept at hand for individual cost elements in order to allow further benchmark with actual costs incurred at the end of the month following the monthly closing period. An example can be seen in the table below, where actual output is linked to standard costs elements per individual products in order to arrive to the absolute amounts of expected spending to be incurred.
Variance Analysis on Standard Costing
Once this activity is finalized a benchmarking exercise can start. Actual costs incurred for the current period are being mapped in comparison with expected costs to be incurred having in mind the current production output mix in the facility. This exercise allows us to see immediately real variances per cost element based on actual production output in order to perform an evaluation of complexity, productivity and profitability of the organization. It is of instrumental importance for decision making and performance management via the immediate feedback that is delivered on how well we did compared to the established standard.
Key elements that need to be taken further into account during the execution of variance analysis are:
A: Price variances of product cost components
– contracted amounts need to be well- mapped and communicated with central purchasing department – minimum changes throughout the year are observed in the production facility, for which reason the impact can often be ignored to a great extent.
Inventory movements from month
B: to month – a change in work-in-progress inventory can lead to increase / decrease of variances between standard cost of actual production output and actual costs incurred during the current period – this impact is not to be underestimated and proves to be an integral part of the applied tool.
In order to grasp the full picture and account for actual production output as well as inventory movements of work-in-progress, a similar mapping activity needs to be performed due to the fact that the company does not have currently at hand automatic work-in- progress posting as established for finished goods material. Thus a full list of inventory items present in work-in-progress needs to be evaluated at standard cost based on the current costing card. The difference between the current and previous period of work-in-progress at standard cost needs to be accounted for together with actual production output at standard cost for the current period. Only then the absolute variance between incurred costs and expected costs grasps fully the performance efficiency and effectiveness of the operating unit.
„Each of the cost elements used in the costing card for individual products within the portfolio has a defined split of variable and fixed portion of costs.“
The example provided in the graph can be applied on total manufacturing cost as well as on individual cost elements – labor, utilities, etc. in order to deliver the right amount of detail needed for implementing corrective actions. Certainly, it can be easily accommodated and used with variable / fixed costs split in order to show the impact of fixed cost absorption and the importance it has for the profitability of the organization. Each of the cost elements used in the costing card for individual products within the portfolio has a defined split of variable and fixed portion of costs. Therefore, the variance analysis can be used at higher level as well as at lower level of detail accommodating for movements and swings in both production output and work-in-progress inventory levels. Clarity of price variance is kept high with minimum impact, while the major focus is shifted towards volume and efficiency variances that can be observed in Bekaert Slovakia and communicated to the appropriate stakeholders– production team, sales team and last but not least to the management team.
„Actual costs incurred for the current period are being mapped in comparison with expected costs to be incurred having in mind the current production output mix in the facility.“
Before moving into the variance analysis applied in individual cost elements, I would like to emphasize how important it is to have transparency and good management of commodity prices and capacity volume utilization. Should prices of product components change it is inevitable to face price / tariff variances, which will in the end make the picture a bit more complicated. The same applies for capacity volume utilization. Should it be that the production output is lower than expected or planned, variances will follow naturally due to the fact that fixed cost of the unit are neither absorbed in the finished goods output, nor in the change of work-in-progress inventory levels.
Plamen I. Michev, M.B.A.
Vystudoval American University in Bulgaria, obor Finance a účetnictví a dále Clarion University in Pennsylvania, kde získal titul M.B.A. Několik let působil ve společnosti IBM a v současné době působí na pozici Finance Manager ve společnosti Bekaert.