Activity based costing presents a more realistic analysis of product costs. Lets look at a typical situation in a woodworking factory.—You move the cutting of a simple oval from a hand router to a new CNC router which costs $200,000. It took two minutes by hand and only one minute on the CNC. Setup time was only five minutes with the hand router and ten minutes on the CNC.

Old math - At $12.00 per hour including fringes manual direct labor was $.40 cents and overhead recovery was $.80. On the CNC labor was only $.20 which is great but the overhead recovered is only $.40. Something is very wrong here! You’ll never recover the cost of the CNC, nor its operating expense (exhaust, electrical, programming, diamond tools, etc.).

With SIM*plicity ABC accounting features each workcenter has an hourly overhead cost and for that CNC assuming a two shift recovery over five years, plus supplies would be about $12.00 per hour more than non-machine operations so lets assume $18 per hour total vs. $6 per hour for manual operations. The part on the CNC then costs $.50 ($.20 labor plus $.30 overhead) The manual operation costs $.60 ($.40 labor and $.20 overhead).

Okay we justified the investment in CNC but what happens when the machines are being setup? Is it a $12.00 per hour employee setting up the CNC or is it a more expensive technician. SIM*plicity can readily handle that distinction .

Lets move on to the run quantity and naively continue to believe that all operators cost the same. SIM*plicity costs products based not only on run time but on setup time of every operation. Using the above example a run of one piece on the CNC would cost $5.50 while manual machining would only cost $2.10. You would have to machine more than twenty parts to make CNC machining viable. The importance of run size analysis can’t be neglected. It allows you to determine true product costs, determine elapsed machining times and when capacity planning is critical select the jobs to be run on the CNC with minimum down time and the greatest labor savings.

Furniture and cabinet manufacturing are different from many other industries. Unlike automobiles where options are just color changes and bolt on features, there are many more customer options that require major construction changes - sizes, veneers, packing in our industry. These process changes plus equipment that often requires more set-up time than run time require industry specific software. SIM*plicity is the answer - not just for activity based product costing but as a complete system that handles your manufacturing business from quotation to cash with only one data entry.