Activity-based costing for the dairy industry

Activity-based costing is valuable for the dairy industry for several reasons:

• ABC is a decision support tool. Information collected to influence the decision making process in forecasting, marketing (pricing) and make or buy situations are based on costs that reflect how the product is manufactured. This provides a natural, realistic scope and associated cost of the production activities in a dairy manufacturing plant.
• Provides a basis for measuring and monitoring performance. This foundation will ultimately lead to enhancement and improvement strategies that management can invoke and measure.
• Provides identification and comparison for one of the traditionally most difficult tasks in dairy cost accounting - the allocation of overhead costs to products.
• Using activity based costing allows management and production to identify pinpoint and respond to specific, detailed problems. Activity accounting regards each activity as a process and focuses on the source of cost. This allows for prevention of problem areas instead of "treating the symptoms."

Once activities are accurately measured, we can calculate costs and profits for specific products, groups of products, types of service we provide for a customer, etc. Just as we have different types of production, selling, and delivery methods we must also be able to identify the differences between these costs. As competitive forces become more prevalent in the dairy industry, activity information becomes even more valuable.

However, many dairies do not realize how intensive and time consuming activity-based costing can be to implement. It would be very rare to give only the accounting department the responsibility of ABC. Many dairy operations have fallen short of their objectives without the assistance of all personnel. Instead, plant managers, engineers, accountants and other play a role in the accuracy of the analysis. Most companies who have implemented successful ABC systems have not done so overnight, but have done so one step at a time.

EBM has developed and maintained its own dairy specific, activity based cost system. We know where to start, what to look for and how to analyze the data rendered by ABC. Regarding costing in the dairy business, EBM serves basically two roles : 1) partnering with dairies, assisting them in developing an internal system for computing cost and 2) working as a independent, objective third party, responsible for all aspects of computing cost data and preparing management reports on a timely basis.

Values are established largely by comparisons or benchmarks. Customers buy your dairy products because they have compared competitive dairies and services and judged yours best.

• An intensive, systematic and disciplined approach for gathering information and evaluating performance
• A process of investigation that results in producing valuable (heretofore unobtainable) information
• A process of learning from how other dairy operations perform in order to stimulate ideas
• A valuable tool that provides useful data for improving virtually any dairy activity

Our oldest service, the EBM Cost Comparison, provides the client with information concerning his operation and the operations of other dairies. For 50 years we have used the comparison service as a guide to review an operation. It is a cost or management audit compiled by experts in the industry. A practical working tool of your business, the McClain report will tell you: if your pay scale is in line, how low you can safely bid on contracts, if your plant layout is efficient, handling cost for plastic gallon of homogenized milk… and much more. It is a report directed at reducing cost and improving profits. The report is compiled and published quarterly, with annual reviews and statistics. During the year our clients participate in labor surveys, case surveys, and other meaningful studies which enhance participation.

Why Benchmark ?

• Strategic planning - measure short and long term goals
• Forecasting - use history to predict trends for the dairy industry
• New ideas - quantify how others are benefiting from technology
• Manufacturing comparison - measure your operation from an "apple to apple" perspective to other operations or to "best in class"
• Goal setting \ Incentive - establish realistic performance goals to similar operations or state-of- the art facilities

The EBM Cost Comparison report contains five to eight pages. Your operation is included within the report along with several other similar processors and a selected national average in each category. You can see at a glance what needs reviewing in order to increase profits. If you do not have the EBM Cost Comparison Service, you are operating without one of the most helpful tools found in the dairy industry. Wouldn’t you like to be certain you are doing everything possible to increase profits?

Information received at EBM is held in the strictest confidence. Subscribing plants submit their individual operating data to EBM Company to be a part of a coded report in which plants are not identified by name. The report only identifies your operation relative to the rest of the participants. No one outside your operation will be able to identify your plant.

We are celebrating our 50^th year in 1997 of exclusive work in the dairy industry. During this period we have developed an historical database and reporting format utilized for a variety of reasons by a variety of different processors. This benchmarking standard developed by EBM and widely accepted by the industry has earned us the reputation as being the definitive source for benchmarking data. In addition to the private sector, we have been asked to supply data for the public sector as well.

Benefits for everyone

Management, accounting, and production personnel all benefit from the comparison report. We cover detailed areas of your operation with different, meaningful statistics not found elsewhere in the industry. Here are some of the following areas covered in detail within the body of the benchmarking report.

• Dairy P & L statement with detailed expenses
• Product and material loss in the plant
• Processing costs
• Plastic handling costs
• Blow mold costs and weight data
• Paper handling costs
• Dispenser handling costs
• Cultured products mfg and pkg costs
• Ice cream mix making
• Ice cream freezing (filling)
• Cooler costs
• Hardening room costs
• Corrugating costs
• Delivery and selling costs
• Administrative costs
• Package ratios (plastic, paper, dispenser)
• Sales ratios (retail, wholesale, platform)
• Gallons per man hour (summary)
• Gallons per man hour (processing)
• Gallons per man hour (plastic)
• Gallons per man hour (paper)
• Cases per man hour (vault\cooler)
• Employees per department \ cost center

Internal and external opportunities

If you have a multiple plant operation, you have two opportunities for reporting: 1) compare internally with your own operations or 2) compare internally and externally with your own operations and other operations under the EBM benchmarking format. We can provide an objective and detailed third party analysis of your operations, eliminating bias and mistrust that can sometimes accompany internally generated comparisons. EBM can provide a one- time audit or assist in ongoing participation.

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EBM Consulting, Inc.
2026 Exeter Rd., Suite 2
Germantown, TN 38138
Voice: 901-755-1683  /  Fax: 901-755-1621
www.EBMConsulting.com
info@ebmconsulting.com
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