Operations and finance managers have the same goal, helping their companies grow profits. But if you’ve participated in an executive team meeting, you know that these two groups often disagree with each other on how to measure and interpret metrics like inventory levels, operating costs, and WIP levels.
During a presentation with one of our prospects, the company’s CFO expressed his interest in breaking the fixed and variable overhead rates into specific categories, or cost elements. His concern was that when cost variances were reported on production run, operations would push them off as a process variance. The CFO realized during our chat that by using an enterprise costing system with a more detailed model, he could determine exactly where the variance originated – machine run times, staffing, machine down time, or anywhere else. That detail would help his team to identify inefficiencies and correct them, reduce costs, save money and ultimately increase margins.
Once we’d moved past the discussion on cost elements, the COO arrived to the meeting. Without knowing what we’d already discussed, his initial reaction to costing systems is “all these solutions are the same and they don’t let you allocate the costs to where they really should be”. Not seeing the first part of the presentation on building unique cost elements, he missed the gun. But the bigger point is that the COO fired a shot across the bow at the CFO over the topic of costs allocations and cost variances. The COO’s reaction was not uncommon. Many operations managers feel that their cost accounting processes are inadequate and don’t provide the information needed to truly run the business. And, the CFO had a valid point as well – operations managers must provide more detail about how costs are accrued during the manufacturing process.
The beauty of a true enterprise cost system is its flexibility to build the cost structure that best represents the business and to accurately allocate overhead across the finished goods. Instead of having to duke it out, finance and operations leaders can both get the information they need, the way they want it.