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

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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