It’s Time to Master Machine Shop Cost Accounting

April 30, 2024

Written by: Paul Van Metre and David Vuyk

Admittedly, this isn’t the most rousing topic in manufacturing today. That being said, in order to successfully operate a machine shop business, it’s pretty darn important to have a good handle on your shop’s financial performance. Let’s begin with a couple of foundational premises: Understanding your business finances shouldn’t feel overly complex. Along that same vein, we’d also posit that you shouldn’t require formal financial education to read through your P&L and balance sheet to extract accurate and actionable insights. On the flip side of that coin, a gut feeling about your financial performance isn’t good enough. You need accurate data presented in a helpful way.

In our experience, there is a significant disparity in the adoption, use, and sophistication of various accounting solutions used by manufacturing businesses today. Shop A might choose a more common accounting solution because it’s the one their bookkeeper and accountant are familiar with. Shop B might search for an accounting-based ERP solution in pursuit of more sophisticated accounting features, even if that solution is void of any MES functionality. In the latter case, we’ve encountered a high-frequency of shops who choose not to use the integrated accounting features of their legacy ERP, because they aren’t user-friendly, instead opting to run a separate instance of a more well-known accounting software, resulting in features that are being paid for, but not used.

Here’s the thing, the secret to mastering Machine Shop cost accounting isn’t so much dependent on a particular software solution. Sometimes, those decisions seem to be mistakenly made according to preference rather than effectiveness. For example, the selection of a more generic accounting-based ERP may require a separate and disconnected MES system to cover the shortfalls of a non-manufacturing ERP solution. Disconnection between the MES and financial system can create some huge shortfalls in truly understanding labor costs, job-costing, WIP and inventory valuation, etc. If you truly want to master Machine Shop cost accounting, your manufacturing execution system needs to be integrated with your financial system. Doing so allows shops to accurately understand their present financial state so that they can be immediately responsive when a problem is identified. You shouldn’t have to wait for a period to close to distill the P&L down to try and understand what is happening in your business.      

The right tool for the job
You wouldn’t purchase a subcompact car to tow around your fishing boat just because of its superior fuel efficiency. Its strength in one aspect would be overshadowed by its shortfalls in other areas. You’d need broader capabilities than that for a complete and reliable boat-launching solution. Similarly, a machine shop needs a complete business management system, not just something that excels in one area. Instead of comparing one accounting solution to another, focus on the key results that such a solution should provide to a manufacturing business. This may include accurate job costing data, easy to view and report-on inventory valuation, work-in-process (WIP) valuation, data reporting, and so forth. Manufacturing businesses are highly dynamic, and so are the requirements of their financial systems. ProShop’s deep integration between MES and ERP functions can accomplish just that. Here are a few key features worth mentioning: 

1. It’s easy to extract and read actionable financial insights from ProShop so that business owners can make informed decisions. 

  • Detailed job costing information is presented for each work order that is processed – in real-time based on the information known at that moment, allowing for real-time decisions that can affect the outcome before it’s realized. Then, the finalized numbers are automatically published when the job is completed. A job cost summary is sent automatically to each user selected via the Messaging System and published on various dashboards so nobody needs to run any reports to view job costing. Customized reporting on job costing data can be presented on a larger scale by date period, customer, work center, operator, job type, work shift, specific part numbers, etc. This provides total visibility on the financial performance of the work you are doing, thereby providing the most accurate and timely data to make decisions.
  • Getting useful reporting out of accounting software can be frustratingly difficult and slow, if not downright impossible. ProShop makes it simple to get nuanced financial reporting and job costing data so that users can make informed decisions.
  • ProShop gives cached reports on what WIP and Inventory are worth at a certain point in time and records that information on a customizable recurring basis so that you know how it changes on a daily, weekly, or monthly basis. It’s also possible to run real-time ad hoc WIP and Inventory reports with a single click.

2. ProShop provides accurate and flexible job costing tools, even for unique scenarios.

  • Sometimes you just want to know simple info like “Which are the worst performing jobs”. The answer can be convoluted in dual ledger accounting systems. Even integrated accounting ERPs don’t manage job-specific costs for unique scenarios like ProShop does
  • Allocating partial costs of job expenses, such as labor costs split across multiple jobs or material and hardware costs split across multiple jobs, can be easily managed in ProShop in ways that aren’t possible in traditional systems. This can also be used for jobs with related fixtures, NRE fees, run-together Work Orders, and many other complex scenarios that are nearly impossible for an accounting based ERP without integrated MES to fully comprehend.
  • Traditional accounting systems don’t have a clear way of understanding the hourly cost of different employees based on their specific labor burden rates. Often, they just pull a standard labor rate for all employee time. ProShop leverages the fully burdened rate of each unique employee to provide an accurate cost of labor on jobs.

3. ProShop isn’t limited by period-specific ledger accounting.

  • Retroactive changes can add huge complications in a dual ledger system, especially after an end-of-month period close. ProShop is always looking at the current live state. It isn’t constrained to a defined time period. Let’s be real, mistakes in time tracking, or other clerical errors are bound to happen, and add considerable complexity to some systems.
  • ProShop effectively tells you what your costs are on a job right now, even half-way through a job. A dual ledger system can only show the costs after the fact once a period is finalized and closed, and it’s too late to affect the outcome.. 
  • Changes made after a period close in a traditional system requires a special entry in order to properly balance, creating extra workload for accounting staff.

In order to successfully lead and grow a machine shop business, you need to understand its financial performance clearly. Shops that run accounting-based ERPs with limited MES functionality often need help understanding the correlation between the results found on their P&L statement and the activities taking place on the shop floor. Your gut feeling isn’t good enough, and the most sophisticated accounting software in the world can’t help you unless you have this vital connection. ProShop’s integrated MES and financial analytics make it possible for business owners to quickly understand the pulse of their financial performance without the requirement of in-depth analysis. 

If you find it difficult to understand your business’s financial situation, consider booking a call with our sales team. We’ve helped 100’s of shops find the needed clarity to drive their business forward and dramatically improve profitability. 

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