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Definition of Manufacturing:

Manufacturing business is any business that uses components, parts or raw materials to make a
finished good. These finished goods can be sold directly to consumers or to other manufacturing
businesses that use them for making a different product. Manufacturing businesses in today's
world are normally comprised of machines, robots, computers and humans that all work in a
specific manner to create a product.

The process of converting raw materials, components, or parts into finished goods that meet a
customer's expectations or specifications. Manufacturing commonly employs a man-machine
setup with division of labor in a large scale production.

Characteristics of Manufacturing

Successful manufacturing companies share a number of attributes.

Firstly, they tend to have savvy, experienced management.

Secondly, they have respectable pay and benefits.

Thirdly, related to this is that they mostly have low staff turnover and positive employee
engagement.

The fourth shared characteristic is a comprehensive employee training program and a focus on
continuing education.

Finally, successful manufacturing companies have a company culture that emphasises open
information flow and innovation.

Professional, Experienced Management

The role of good management in a successful business cannot be overemphasised. Strong


management has an intimate knowledge of the dynamics of their industry. Effective
management knows how to identify, recruit and promote capable staff, as well as when to
delegate. Strong management is also forward-looking and seeks to optimally balance resources
between current production needs and innovation in future process and product improvement.

Fair Compensation and Benefits


Almost all successful manufacturing companies have reasonably generous wage and benefit
policies. This, of course, leads to higher employee job satisfaction, which in turn leads to a
happier and more productive workplace environment.

High Employee Satisfaction and Low Turnover

Successful manufacturing companies also tend to have high employee satisfaction ratings as
well as low employee turnover. This is certainly related to the good pay and benefits, but it also
relates to a pleasant, productive work environment and feeling valued as an employee.

Comprehensive Training Programs

According to the "Leadership & Organization Development Journal," a focus on training, both
company-sponsored workshops and seminars and tuition reimbursement for continuing
education, is typical of successful small manufacturing companies. Comprehensive training not
only helps employees do their jobSuccessful manufacturing companies share a number of
attributes. First, they tend to have savvy, experienced management. Second, the top
manufacturing companies all have fair to generous compensation and benefits. Related to this
is the fact that most successful manufacturing companies have low turnover and a general
employee perception of being treated fairly. A fourth shared characteristic of successful
manufacturing companies is a comprehensive employee training program and a focus on
continuing education. Finally, successful manufacturing companies have a company culture
that emphasizes open information flow and innovation.

Activities in Manufacturing Companies

Activities basically fall into four different categories, known as the manufacturing cost
hierarchy. These categories are generally accepted today but were first identified by Cooper
(1990). The categories of activities help to determine the type of activity cost driver required.

The categories of activities are :

1. Unit level activities: The costs of some activities (mainly primary activities) are strongly
correlated to the number of units produced. For example, the use of indirect
materials/consumables tends to increase in proportion to the number of units produced.

Another example of a unit level activity is the inspection or testing of every item produced, if
this was deemed necessary or, perhaps more likely, every 100th item produced.
2. Batch level activities: The cost of some activities (mainly manufacturing support activities)
are driven by the number of batches of units produced. Examples of this are :

Material orderingwhere an order is placed for every batch of production

Machine set-up costswhere machines need resetting between each different batch of
production.

Inspection of productswhere the first item in every batch is inspected rather than every 100th
item quoted above.

3. Product level activities: The costs of some activities (often once only activities) are driven
by the creation of a new product line and its maintenance, for example, designing the product,
producing parts specifications and keeping technical drawings of products up to date.
Advertising costs fall into this category if individual products are advertised rather than the
companys name.

4. Facility level activities: Some costs cannot be related to a particular product line, instead
they are related to maintaining the buildings and facilities. Examples are the maintenance of
buildings, plant security, business rates, etc. Also included in this category are salaries, such as
the production managers. Advertising campaigns that promote the organisation would also be
included.

The first and last categories above are the same as those in traditional absorption costing and
so if an organisation costs are mainly made up of these two categories ABC, will not improve
the overhead analysis greatly. But if the organisations costs fall mainly in the second and third
categories an ABC analysis will provide a different and more accurate analysis.

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