Three Requirements of an Effective Cost System – Part Three

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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