Effective prime cost management tool helps you track all direct costs and predict future expenses to improve your business accounting and planning. TranZact is a cloud-based software for SME manufacturers that provides all the data related to material purchases and labour used in manufacturing processes. This improves your production management and financial decisions.
In this blog post, we will learn how TranZact helps you implement the best practices to improve prime cost management in your manufacturing business.
Understanding Prime Costs
Prime costs are the total costs of direct materials and labor used in making final products in manufacturing businesses. It is important for manufacturers to calculate prime costs to set prices for their finished goods with a profitable margin. If you manage prime cost with best practices, you can have a competitive advantage when setting prices for the final products.
Read here What Is Prime Cost?
Let’s learn about prime costs in detail to have them under control.
A. Components Of Prime Costs
Below are the components of prime costs that help you find out direct expenses in manufacturing finished goods.
- Direct Materials: These are all raw materials used to manufacture certain products. You should make a complete design of products to track all types of raw materials used and improve your prime cost management.
- Direct Labor: These are the machine operators and workers in the assembly lines directly involved in manufacturing products. You can use tools to automate processes and reduce manual methods to save money in your prime cost management.
B. Prime Cost In Business Accounting
You can use prime cost in business accounting to improve visibility into raw material purchases and direct labourers involved in manufacturing. Here are the steps to improve your calculations.
- To calculate the total material costs, find out the costs of beginning inventory, new material purchased for production, and closing inventory.
- Put the data in the formula:
Total material costs = Costs of beginning inventory + Costs of new material purchased - Costs of closing inventory.
- Similarly, identify the total labourers involved in manufacturing and find out how many hours they have worked and their hourly wages.
- Put data in the formula:
Total labour costs = Hourly wages × Hours worked.
- Use the prime cost formula for the final calculation:
Prime costs = Direct materials costs + Direct labour costs.
You can report this data in financial statements so that decision-makers can identify processes that cause extra expenses to improve cost control. This can help you manufacture final products within budget limitations and improve demand management.
C. Prime Cost In Business Planning
Prime cost in business planning helps you improve budgeting and forecasting activities based on your manufacturing goals. When you accurately calculate prime costs, you can set production targets that can be achieved within your budget. This can also help you improve your business capacity on time to fulfil high demands.
With accurate forecasting in prime cost management, you can make strategies to expand your manufacturing business over time and achieve your manufacturing goals.
Understand Prime Costs Vs. Conversion Costs: What's The Difference?
Best Practices For Prime Cost Management
Here are some of the best practices for prime cost management that you can apply in your business for increased productivity and profit margin.
A. Accurate Cost Tracking
For accurate cost tracking you can use tools like inventory management software. These help to track stock levels and purchased materials in real-time. You can also use production control software to monitor all labour involved in manufacturing processes. This can help you improve accuracy even further.
B. Regular Cost Analysis
Regular cost analysis helps you identify processes that can be improved to save money. You can use methods like activity-based costing and historical data analysis to identify trends and variances in costs and make informed decisions based on your requirements. This can help you take action on time to solve issues that cause extra expenses in manufacturing.
C. Streamlining Production Processes
You should streamline production processes to reduce waste and use resources like raw materials and labour for maximum output. You can use techniques like discreet manufacturing, batch production, and lean manufacturing that suit your specific requirements to improve processes. This can help you reduce waste and improve prime cost management by focusing on manufacturing products that make profits for your business.
D. Supplier Evaluation
When you want to buy raw materials at the right prices, you should focus on supplier evaluation to get the best deal. You should make good relationships with your suppliers to buy high-quality raw materials at appropriate prices. You should also keep in contact with alternative suppliers to purchase materials based on requirements on an urgent basis.
E. Implementing Lean Manufacturing Principles
Lean manufacturing principles help you reduce waste and improve production efficiency. You can use these principles to focus on high-value products and improve their quality to fulfil customer requirements. It also helps you control the costs of raw materials through techniques like just-in-time inventory to improve your prime cost management.
You use the following lean manufacturing principles in your business to improve production efficiency.
- Value - It helps you identify the value of products that customers seek when buying.
- Value stream - It helps you organize work in the best order to reduce waste and achieve production targets within budget and on time.
- Flow - It helps you identify bottlenecks so that you can solve them on time to avoid disruptions in production.
- Pull - It improves your production planning and helps you replenish inventory based on sales forecasts to improve order management.
- Perfection - It helps you monitor your performances regularly and improve strategies according to demand to execute your production processes perfectly.
Strategies For Prime Cost Management
Prime costs can be affected by the strategies you follow in your business to manage production processes. Here are some of the effective strategies for prime cost management that can help you manage processes according to your specific requirements and control it.
A. Proactive Cost Management
You should focus on manufacturing products within budget and increase profit margins. You can analyze market trends and previous expenses in raw materials and production processes to identify changes and modify your processes accordingly. It can help you manufacture products at lower prime costs than competitors and improve pricing decisions.
B. Integration With Business Planning
Integrate your cost management strategies with your business planning to achieve your manufacturing goals. It can help you reduce the costs involved in all manufacturing processes. It can also help you focus on high-value products and plan your production targets according to market trends. This can help you increase your return on investments (ROIs).
C. Leveraging Technology For Cost Management
Use software solutions like TranZact in your manufacturing business to manage processes and control prime costs. It can automate processes to improve visibility over your expenses, reduce errors and waste, and prevent fraud. It also helps you analyze the performances of your suppliers to get the best deal every time you purchase raw materials. It provides you with real-time data on expenses so that you can manage prime costs and your budget at a place.
How TranZact Facilitates Prime Cost Management?
TranZact offers complete visibility end-to-end for SME manufacturing businesses to improve prime cost management. Its Reports & Intelligence module provides detailed purchase reports to analyze your expenses involved in production processes. TranZact’s Payments module offers complete visibility over your amounts paid, payable, and overdue payable to manage your budget limitations.
Here are some easy-to-use features of TranZact that can improve prime cost management in your business.
- MRP Reports: It generates accurate materials requirement planning (MRP) reports to plan your production targets according to your budget.
- Multi-Level BOMs: It creates multi-level bills of materials (BOMs) by analyzing each manufacturing process and including purchase and labour costs. This improves accounting and visibility over your prime costs.
- Supplier Details: It allows you to record the details of multiple suppliers from different locations to simplify your purchase and supply chain activities. This helps you analyze suppliers' performances and get the best deal.
- Receipt Of Purchase Orders (POs): It records all the previous receipts of purchase orders and improves visibility over your purchases.
- Purchase Invoices: It provides you with all purchase invoices in real time to calculate prime costs and make informed decisions.
- Inventory Management: It offers complete visibility over your inventory in multiple warehouses and alerts you on time for stock replenishment to improve production processes and purchasing decisions.
- Work Orders: It generates accurate work orders to utilize the directly involved workforce for maximum output to increase production efficiency and manage prime costs.
Improve Your Prime Cost Management With TranZact
It is important to adopt the best practices to improve prime cost management and sell your products with higher profit margins. TranZact is an easy-to-use software and offers many features to track your expenses, buy raw materials from the right suppliers, improve production processes, and use techniques to manage your inventory and production.
With TranZact, you can manage prime costs, manufacture products within budget, and have a competitive advantage when setting selling prices. It comes with sales & purchases, inventory, production, and payment modules to provide complete visibility and manage everything from enquiry to dispatch using a centralized dashboard.
Implement TranZact in your business today to manage prime costs in just 14 days!
FAQs
1. What is prime cost management, and why is it important in business accounting?
Prime cost management is sum total of of direct materials and labour costs involved in manufacturing finished goods. It is important in business accounting to improve visibility over expenses and set competitive pricing for finished goods.
2. How does accurate cost tracking contribute to effective prime cost management?
Accurate cost tracking helps you analyze the costs involved in each process and identify those that cause extra expenses so that you can modify your strategies to control prime costs.
3. How can lean manufacturing principles be applied to prime cost management?
Lean manufacturing principles help you focus on high-value products, reduce waste in processes, and increase production efficiency, which helps you manage prime costs.
4. How does TranZact assist in regular cost analysis for better prime cost management?
TranZact generates purchase, production, inventory, and accounts reports that help you with regular cost analysis and better prime cost management.
5. Why is regular supplier evaluation important for prime cost management?
Regular supplier evaluation is important for prime cost management because it helps you buy raw materials at appropriate prices each time.
6. What are the benefits of effective prime cost management?
The benefits of effective prime cost management are as follows:
- Manufacturing within budget
- Higher profit margins
- Better pricing strategies
- Increased cost controlInformed decision-making
