Wood Costing and Inventory Control Guru

We are looking for an advisor.

We are a producer of finished wood products. We buy wood in bulk then convert that wood into various finished products. We are experiencing high amounts of material loss and would like to make changes to our cost accounting and inventory control process around wood.

I am seeking an advisor to help us:
1) Identify best practices for wood cost accounting
2) Identify best practices for wood inventory control
3) Potentially help identify solutions
4) Potentially help implement solutions

You should have a deep knowledge and experience in wood cost accounting and inventory control. I am looking for a veteran that has lived in a wood product environment crossing both functions of inventory and cost accounting.

This project will start small with just some exchange of ideas and may lead to a bigger role in the future.

Answers

Barrett Peterson Senior Manager, Actg Stnds & Analysis • May 26, 2012

I am not the furniture expert, but have worked in a company with lumber operations. Your inventory issues are likely to be very common with other industries with a similar manufacturing process so I encourage you to seek individuals with similar processes and a good understanding of the business. Inventory and cost accounting systems will not reduce high waste, which depends on operating process design and production scheduling. "Shrinkage" loss reduction will depend as much on access limitation/locks as accounting systems, which account for but do not preclude losses. Your system may also have to consider any types of wood you use which source from environmentally restricted sources.

Peter Green Business Support and Development Manager • May 28, 2012

Typically you first need to inventory all of your products, including purchased and manufactured components etc. (maybe you have this already).
Purchased in products typically valued at buy price as for any other raw material.
Manufactured components can be valued as the cost of the raw material plus a processing conversion cost. To do this you typically require a "Bill of Material" for each component, that defines, the source product used as raw material (use most likely if there are several choices) and define the % yield (require feedback from history of previous manufacturing runs - may need to establish this data collection/reporting). The conversion cost is best done on a unit cost of time. Calculate the total running cost of the machine over a period like a month or a year. Then calculate the number of productive operating minutes that aligns with the assumed costs (can both be done a part time basis if thats how you operate). This gives you a cost per minute. Then relate the speed of production for each output component - how many, how much volume (whatever units you work in) per time unit and convert to minutes. In effect you can get to a conversion cost per component.
If you have each finished good product tabulated with the feedstock/unit cost/yield and feed speed you should be able to estimate the total cost per component. Record actual manufacturing data to feedback and refine.

Wayne Spivak President & CFO • May 29, 2012

A major player in addition to the sage advice given by Barrett & Peter is what accounting system (manufacturing, MRP, ERP) system do you use, is it configured correctly and being used[correctly] ?

Proper systems (both manual and computerized) will go a long way to solving many of your problems.

Second, have you re-looked at the set-up vis a vis the raw stock used to manufacture your WIP/Finished Goods? Is it possible that you are buying the wrong Raw or choosing the wrong Raw for a given job?

Patrick Dunne Chief Financial Officer • May 29, 2012

I know of one team that focuses on this for the paper industry as they addressed material usage issues and inventory control issues in our company. I will send you a private message with contact information. They can help you address material losses due to moisture among other issues. Their cost accounting help may not be as strong, but you can evaluate that in talking with them.

David Monroe Managing Consultant • May 29, 2012

This is an issue for a consulting project, but I will give you a few hints. I have worked in lumber processing in which we produced unfinished furniture, a whole array of mouldings, and rough boxes (shook). I assume you can track the lumber going into the first stage of processing, so costing is based on amount of product you get out of each stage of processing. In otherwords, it is the amount of wood in, less the product coming out based on square feet -- the difference is waste or scrap based on the cost per sq foot of the raw lumber. You can follow that same concept through each production stage until you wind up with a finished product. The key is to cost raw lumber on a per sq ft basis, and then cost what was completed at stage of production based on the total cost of material input plus production costs and overhead -- this factors in the waste factor.

While you can calculate actual production waste, you can set a waste allowance or standards for each stage of production, as well as the costs incurred at each cost center of production. You can then measure the actual waste costs to the standard allowance and the actual production achieved to the standard or goal..

If you recover some scrap for finger joint boards, you have to decide how you want to value the scrap wood used to make finger joint, plus the cost of finger joint processing. This recovery should reduce the cost of the waste from the original production that produced that waste. Again, you can set goals or standard recovery, and then measure actual against that standard earned for actual production.

As indicated at the outset, I earn consulting fees for developing this kind of wood products production, so I have provided only a general overview here.

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Wood Costing and Inventory Control Guru

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