In 1913 the first moving assembly line was installed by Henry Ford, reducing the time it took to build a car from more than 12 hours to just two hours and thirty minutes. Ever since, the production of automobiles has seen innovation after innovation, revolutionizing the industry and contributing to the overall automatization of car-making. As technology continues to be introduced, it reduces the number of human workers needed on the production line. For our automotive clients, this shift towards more machines than humans has many implications for accounting and operations.
The benefits of using robots to produce automobiles appear straightforward. Machines are more consistent, with faster production times and fewer errors. However, they also involve more upfront costs and can be a significant investment for many companies. In the long run, these investments can lead to less demand for human labor, though the reduction to a company’s workforce is offset by the need for more highly skilled employees to operate the systems. As many new automotive manufacturing plants are located in rural regions, attracting and retaining these employees may be a challenge.
There is also an argument for retaining human labor. Automobile production jobs are low skill and provide a living wage, with an average hourly rate of $21.56 for production and nonsupervisory workers (Bureau of Labor Statistics website). The automobile industry sees large and frequent shifts in consumer tastes, prompting automobile contracts with manufacturers to run less than five years, with the possibility of early contract termination due to lower than expected sales. This results in a disconnect between the high upfront costs needed for machine production and the short term useful life of these machines. These shifts can be alternatively managed through the use of temporary employees on short term contracts. Adjusting payroll to meet production needs at any given time can better match industry demands with a company’s costs.
Automotive companies with significant fixed assets involved in production have a number of different accounting issues to consider vs. entities that are more labor intensive. Labor and overhead cost calculations for production lines with more employees will focus on the number of labor hours worked. When using robots, there is a higher percentage of inventory value that is attributable to management judgment. Depreciation of the fixed production assets involves management judgment, as there can be questions regarding their useful life. Car model-specific machinery often will be connected to the length of a contract, which determines the initial useful life. As models are deemed obsolete or new models developed, fixed assets connected with the production of these models will have to be reassessed for their useful life.
Management must also ensure an accurate allocation of overhead is computed and applied to each piece of inventory. The valuation of inventory is more of a risk due to many factors behind the overhead rate of an item. For instance companies may take into account estimated production levels to determine overhead rates. Large differences in the actual production can lead to over or under valuing if production is not in line with that estimate.
As automotive production lines become more automated, this will present new challenges for management. Mazars can provide expert advice on questions ranging from proper allocation of overhead cost and supply chain optimization, to tax credits and deductions related to fixed asset purchases.