Why Management Accounts? To Purchase or Manufacture?

In this entry in our series on ‘Management Accounts – The Benefits’, we looked at how the production of Management Accounts for your company can clarify whether it would be more beneficial buying a product or manufacturing your own.

The production of Management Accounts allows businesses to analyse supplier costs, wage costs and production costs among many more on a monthly basis. Such detailed analysis of a company’s costs could easily allow for calculations on the optimum product pricing strategy. By determining the fees or prices for goods it helps to determine the selling price of the product and remain competitive.

For example, before the production of Management Accounts a company could be selling product A at £2.50 per unit. Following the production of their Management Accounts and analysis of the firm’s overheads, it may be determined that in order to cover the costs of the company the product should be sold at £2.80 per unit, with any applied mark-up resulting in a profit per unit.

However, what the production of such data can do is allow for comparisons to be made between purchasing and manufacturing. For example, the data would allow for calculations to be made on how much it would cost a company to manufacture its own products. With all relevant costs considered, it may be determined that it would cost the company £5.80 per unit to manufacture their own product or purchase that same product from another supplier for £6.20 per unit.

Case Study

Our work with a client in the engineering sector, to implement Management Accounts for them on a monthly basis, allowed them to compare the cost of buying products and manufacturing their own.

The information that AMAS produces raised questions on whether they were losing out financially by purchasing products rather than producing their own. The ability to analyse their current cost base, as well as the costs of both options accurately, showed them that manufacturing their own products would have a positive financial impact moving forward due to lower costs per unit being achieved.

AMAS are one of Scotland’s leading Management Accounts specialists, with numerous experiences in the implementation and production of Management Accounts.

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