Posts Tagged ‘Analytics’

Three Requirements of an Effective Cost System – Part Three

Monday, April 25th, 2011 | Posted by Stacey Adams in Blog

In the first two parts of this blog, we’ve talked about the importance of having a complete view of costs and how multiple sets of product costs are critical for decision making.  In this final chapter, we’ll talk about the importance of integrating the cost system within the enterprise and how buy-in across the organization is a vital component for success.

Full System Integration

In an article from Business Performance Magazine in 2008, the author opened with the following quote from an operations manager from a Fortune 500 company.  “Do you know what we think of our cost accounting system?  It is a bunch of fictitious lies – but we all agree to it.”  As you read further, the article describes the lack of depth of cost analysis and how limited data integration leads to faulty and misleading cost data.  That misinformation is then used to analyze business performance – a problem that many cost managers face at manufacturing companies across the globe.

The biggest concern for cost managers is that they do not have the ability to accurately calculate costs.  Production data lives in one system and general ledger spending is somewhere else.  The cost manager is in spreadsheet hell building formulas based on their interpretation of how costs should be calculated.  None of these processes are connected, the potential for error is huge, and the business leaders are using this data to as a basis for their critical production and sales decisions.

By fully integrating accounting and production data, the integrity is maintained and potential errors are essentially eliminated.  With all of the data points connected, integration expands the depth of cost data analysis and mangers can learn more about their true manufacturing costs.  For example, you can determine the effects of a changing raw material price on all of the products in your catalog that use that particular material.  Or, you can compare costs of producing the same product in two different locations and account for the differences in the manufacturing process at each location.

Organizational Buy-in

The above statement from the operations manager isn’t just about the system, it’s about the people, too.  Costing is one of those business functions that crosses department lines, and agreement is critical for the success of any enterprise-level costing system.  Senior managers and executives must engage as coaches, referees, and judges to ensure that the project moves forward and achieves its goals.  Many times cost system implementations require rethinking and reengineering business processes in accounting, finance, operations and sales. Without executive involvement, the project can easily become stalled or sidelined.

In addition to leadership, the front-line also needs to play a critical role in implementing the cost system.  These are the people who know how things work: They are on the shop floor when the product is manufactured; they manage the countless spreadsheets in an attempt to calculate product costs; they are face-to-face with the customers closing deals.  Building an effective costing system means linking these groups together to make decisions that are aligned with the company’s goals, drive the desired behaviors, and ultimately help business leaders make decisions that improve profitability. 

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Top Eight Warning Signs You Have a Dysfunctional Costing System – Part 2

Tuesday, January 4th, 2011 | Posted by Stacey Adams in Blog

Broken screen of computer

The book Designing Strategic Cost Systems: How to Unleash the Power of Cost Information by Lianbel Oliver has a great list of warning signs that may indicate that your company’s costing system is dysfunctional.  Make sure you check out Part 1 of this blog where I covered the first four signs.  And without further ado, here’s the rest…

#5 – Managers Don’t Understand Product Profitability

Products that are manufactured at high volumes generally have predictable cost results.  Why?  Because they’re manufactured regularly, operations folks are familiar with the processes and require less ramp-up time to produce the goods.  But for some lower volume products, calculating the product cost can become a bit of a mystery.  While the labor and materials required is the same for both high and low volume products, a product that is produced infrequently includes a learning curve that can ultimately increase the cost of the product.  This additional cost may not be captured, thereby skewing the results and leading business leaders to make incorrect decisions on topics including about product mix, pricing, and customers.

#6 – Accountants Spend Too Much Time on Special Requests for Analysis

If accountants feel like they’re recreating the wheel each time product cost information is requested – Houston, we have a problem!  The basic cost information needs of the organization should be readily available through the system allowing cost accountants to focus their efforts on true analysis needed to improve business performance.

#7 – Inconsistencies in Reported Data

Manufacturing companies know all too well that financial accounting and cost accounting are two separate animals with unique purpose.  Even with the difference, the core data used for each function should come from the same source.  The number of units produced or transactions processed in the costing system should match those in the general ledger.  Tight integration of costing, finance and operations systems is required to eliminate problems with inconsistent data.

#8 – Managers Make Suboptimal Decisions

Ever heard the idiom “Robbing Peter to pay Paul”?  Many times costing processes are designed to make decisions that are not in the best interest of the organization.  One example from the book talks about a manager who inflates standards to meet performance levels without understanding how this decision could adversely impact marketing or pricing.  The costing system should help all parts of the business run optimally and help managers make decisions that promote the company’s overall profitability.

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What does it cost us to produce this product?

Wednesday, December 15th, 2010 | Posted by Scott Crittenden in Blog

Business people with question mark on boards

Sound familiar?  This question is asked countless times by a variety of people inside a business – operations accounting, plant accounting, sales and marketing, and even research and development.  In most cases the answer is given as one general cost number derived from a universal standard rate and unit of measure within the business.  My clients with complex manufacturing processes would tell you that before they can answer this question, they need to ask you a few questions.

Where was it produced?
What plant or what line was the item produced?  Different plant and line specific costs can exist when producing the same product.

When was it produced?
Was it part of a full production run, or a small specialty order?
When did it hit inventory?  And, is there an aging cost or a layered cost as part of the total cost?

What raw material price was used?  And, is it at standard or actual?
Did we use sales price, market price, or some average price to value the raw material?

What accounting methodology or logic is being used to calculate cost?
Does your company use a frozen yearly standard, running three-month actual, up to date current yearly standard, fully absorbed at current capacity, fully absorbed at standard capacity, or some other accounting methodology?

Answering these questions is simplified when you use an enterprise costing system like ImpactECS that allows multiple sets of cost to exist simultaneously for the same finished SKU.  Process manufacturing companies need to analyze their costs from multiple perspectives, and visibility to trustworthy costing data before you implement a change gives you the ability to make sound business decisions.

Most manufacturing companies today are challenged with multiple production environments and complex manufacturing processes.  This often means that one cost per product is not sufficient for the kind of detailed cost analysis needed to compete successfully.  By developing a costing process that includes an enterprise-level costing solution, you’ll have the tools to answer all of these questions and more. 

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Top Eight Warning Signs You Have a Dysfunctional Costing System – Part 1

Thursday, December 9th, 2010 | Posted by Stacey Adams in Blog

Oops! Road Sign

Last week I was sitting at my desk trying to think of a blog topic, and the ideas were coming slowly.  Since our team has started blogging, my usual well of ideas has dried up because everyone’s saving their best ideas for their own articles. Then out of nowhere, our newest application specialist, Bhavin, decided to pop in to tell me about an interesting book he’d just finished by Lianabel Oliver called Designing Strategic Cost Systems: How to Unleash the Power of Cost Information.  After I read the section he shared on dysfunctional cost systems, I knew I had some valuable information that could help manufacturing companies understand the problems inside their costing process.

The book talks about the eight internal warning signs that indicate your costing system is dysfunctional.  In part one of this blog, I’ll discuss the first four signs and what companies need to consider when designing their costing processes.

 #1 – Financial reports are inaccurate or don’t reflect business operations

Call it a sixth sense, intuition or ESP, but business leaders know how their businesses operate.  Plant managers know how swapping raw material inputs or changing to a different production line will impact costs of a product.  And when they see reports that don’t line up with those expectations, they tend to distrust the results and ultimately stop relying on the data.  To gain acceptance, cost accountants need to take an in-depth look at both their operations and accounting processes to develop a system that is true to their manufacturing process and accounting methodologies.

 #2 – Managers are unable to explain financial results

The best way to verify if you know something is to teach it to someone else. Accountants who cannot give a simple explanation to their financial results from a business perspective have no idea what the results mean.  It’s easy to hide behind explaining the logic and never tying it back to the actual business. But for managers to clearly relate the results to the business, an alignment between the cost system and the business process it represents is fundamental.

 #3 – Managers don’t use financial reports

Oliver discusses four reasons that managers don’t use reports: (1) the reports are too late; (2) the information is stale; (3) the reported costs don’t reflect the true costs of the operation, and (4) they are too difficult to understand.  For costing to become an essential component of decision-making for any organization, the costing system must make up-to-date costing information available from a straightforward interface.  They need the ability to build reports that capture the information important to the organization in a format that is both digestible and actionable.

#4 – Managers develop their own cost models

If the operations team doesn’t buy in to the costing methodology, they will build their own offline costing models to support their decision-making process.  Ultimately, having multiple costing processes existing inside one company can only lead to confusion and negatively affect the company’s profitability.  Gaining agreement from the users and customers of cost data within the organization on the costing methodology is a critical step in implementing any costing system.

Fortunately for you (and me!), my next blog is already underway. Stay tuned for part two where I’ll cover the second four signs that could mean your cost system is dysfunctional.  

Update:  Read Part 2 of this blog series to read about the final four warning signs.

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Black Boxes: Great for Airplanes, Terrible for Forecasting

Wednesday, November 3rd, 2010 | Posted by Stacey Adams in Blog

BlackBox_Blog_SAdams_110310_11636884
We’ve all heard of black boxes on airplanes that track critical flight data. Without discrimination, the black box records everything that is happening in the cockpit and on the aircraft. And in the event of an emergency, it’s up to the accident investigators to decipher the recorded data and put the pieces together to determine a cause.

I just finished reading “Cleaning the Crystal Ball” where the authors discussed the concept of the black box as it relates to forecasting business results. Just like the airplane, many business models have become black boxes that capture information indiscriminately and generate results without providing the users an explanation of the underlying drivers and assumptions. The role of the business leader shifts from captain to accident investigator where he is tasked with making sense of the results, often when it’s too late to make adjustments.

With transparent models, business leaders regain the captain’s seat because they recognize and react to the changing environment as it happens. They become proactive instead of imprudent as their confidence in the model’s results grows. And, they reduce the number of catastrophic decisions that could lead to disastrous business results.

For product costing in process manufacturing industries, a transparent model must provide both detailed data and straightforward logic. With multiple work-in-process points, complex parent-child relationships, expansive bills-of-materials, and large catalogs of finished goods, the user must be able to navigate through and drill into the model to expose the underlying factors that contribute to a particular result. The ability to peel back the layers eliminates the “black box” syndrome because the user can identify how the results came to be. Furthermore, by ensuring that the logic behind the model lines up with the company’s existing business practices, confidence in the model is bolstered and business leaders are less likely to “go with the gut.”

So when you’re building a product cost model, forget the old joke that says “Why don’t they build the airplane out of the same stuff they use to build the black box?” Instead, look for a modeling tool that helps you build a transparent, user-centric solution that makes sense for your business.

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