It’s the Cost!!!

Today I met with finance and operations managers for a manufacturing company that didn’t really understand the unique costs of each product they produce.  As a result, they weren’t really sure of the margins being created by each product and customer they serve.  The interesting part was that these very same managers were pondering whether they could afford to invest in a costing system.  As I listened I couldn’t help but wonder, “How can you NOT afford to invest in a costing system?  Doesn’t everyone know that a true and accurate understanding of your product costs is paramount to the success of a competitive, commodity business? “

As the meeting continued, topics like capacity utilization, fixed cost absorption, and the need to produce forecasted costs based on future period sales forecasts and radically changing raw material prices came up.  The voice inside my head yelled, “How can you NOT afford to invest in a costing system?” Admittedly and shamefully adopted from the political arena, I too often find my inner cost accountant shouting IT’S THE COST STUPID!, and right then I knew the name of my blog.

At the heart of any successful commodity-goods manufacturer is a cost-focused culture that understands and embraces this mantra.  In these challenging economic times – arguably more so than in better times – a full understanding of the true and accurate costs incurred at the unique product level are of utmost importance. In fact, this data truly creates a competitive advantage in the market place.  True and accurate costing data that allows me to decide where best to produce my products, which of my production lines to set idle, which orders and price points to accept and which to reject, gives me an advantage over a producer that doesn’t share the same level of cost insight.  Without this insight my seemingly correct answers to these questions could lead me in the exact wrong direction.  A seasoned cost accountant once told me, “There is much truth in detailed, accurate cost data”.  Perhaps it is this truth that many business leaders are afraid to face!

As I wrapped up today’s meeting and we parted company, my gracious hosts shared with me proudly their plans for an upcoming ERP upgrade project that was scheduled to take two years to complete.  We wondered together whether they should work towards understanding their product costs now or wait until after the ERP project.  Arghhhh….  Say it with me…  IT’S THE COST!

Don’t Force Your Managerial Accounting Process into a Transactional System

I have spent the majority of my technology career in the Manufacturing Computer Systems space and have been most impressed with how the world of technology has improved our ability to automate payroll system for small business.  MRP solutions morphed into ERP solutions.  The ability for a company to design, order, buy, build, ship, invoice and produce a financial statement reflecting their business during a given period of time has provided tremendous gains in not only the transactions costs of doing business, but the ability to manage that information in large quantities.  Multi-country, multi-language, multi-plant, multi-tax code, multi-currency, multi-multi-multi has been a godsend for those large international manufacturing companies.  The likes of SAP, Oracle, Linode, and others have provided the transactional information essential for running a complex organization. If you need help with your computer system such as how to rotar pantalla go online. 

These systems do a great job of building a standard cost for a product or SKU.  This cost is needed to build a cost-of-goods sold and provide the basis for financial reporting.  However, where these transactional processing ERP systems fall short, is the ability to provide detailed managerial cost accounting information and flexibility.  These systems were not set up to track simultaneous multiple costs for the same SKU and easily manage these different cost attributes by plant, by process, by date, by material substitution, by shift, by packaging etc.  Only a standard cost and current cost are easily handled.  Building rates inside the factory at the machine, work-center and department levels don’t exist.

By using ERP systems for process manufacturing costing processes is often like forcing a square peg into a round hole. The detailed cost data they need to track is splintered away and they’re forced to use a spreadsheet or build a database program to handle the analysis.  I had one controller tell me that his company had “blown up” several computers trying to replicate their costing processes in a spreadsheet. Understanding the role of legal expertise in managing online risks is critical for anyone working within the tech industry. Ensuring that you have the right support can make a significant difference in how effectively you can safeguard your projects. For more information on finding the right support, just click here for legal support. Process manufacturing companies must become aware that there is an alternative solution of managerial cost accounting that resides in complete harmony with the traditional transaction ERP systems. It is good if you will learn how QuickBooks Pro can help you organize your business finances all in one place so you can be more productive. Those who manage health clinics may need accounting skills or outsource CentralReach Managed Billing Services to help with the management of their patients’ bills.

Black Boxes: Great for Airplanes, Terrible for Forecasting

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.

What’s more important, standard costs or actual costs?

Professors Jennifer Dosch, CMA and Joel Wilson, CPA, recently published an article in Strategic Finance Magazine discussing the differences between textbook and real-life product costing for manufacturers. They took a look at three consumer packaged goods manufacturers to undercover the methodologies used to calculate product costs.

“Based on our analysis of three companies that differ significantly in size, the industry practice of process costing focuses considerable effort on developing accurate standard input costs and volumes to help manage business operations efficiently and effectively.”

Read the entire article here: https://findarticles.com/p/articles/mi_hb6421/is_2_92/ai_n55049110/?tag=content;col1

For many ImpactECS customers, calculating both standard and actual costs are an important part of their overall costing process. Is there a focus in your organization on one cost over the other, or are they equally important in driving decisions for your company?

How have the changes in the world economy affected how your company views cost management?

A recent article published by Jonathan Schiff and Allen Schff discussed the importance of cost leadership to tackle these challenging economic times. Their premise is that “cost leadership is reflected in a culture that, independent of macroeconomic circumstances, pursues a lowcost, high-quality, customer-centric approach to managing the business.”

Read the entire article here:
https://www.allbusiness.com/economy-economic-indicators/economic-conditions-recession/13422252-1.html

How have the changes in the world economy affected how your company views cost management?

How important is forecasting to the cost accounting function at your company?

Most people associate cost accounting with analyzing past events – calculating actual costs, analyzing yields and variances, and creating reports. More and more, companies are looking for ways to grow their cost accounting function to include predictive analysis to help with decision-making throughout the organization.

How has the cost accounting function changed in your company? Is there a bigger emphasis on forecasting future performance? And, what tools are you using to implement this new approach?

What is the relationship between finance and technology leaders in your organization?

“CFOs and chief information officers don’t always see eye to eye, even on vital matters like risk management and cost control. But there may be more common ground between them than is typically thought.” This month, David McCann talks about the relationship between CFOs and CIOs and how there is much more common ground than one may think.

Read the article “Harmony in the C-Suite” here

What is the relationship between finance and technology leaders in your organization?

What are the challenges you face in accurately calculating profitability?

3C Software recently posted an article on their website discussing the challenges process manufacturers face with calculating profitability. It starts with the premise that calculating costs is the most unpredictable part of the traditional profit calculation:

“One of the first lessons of accounting is the equation Profit = Revenue – Cost. Since aggressive revenue growth is not in the cards for many manufacturers, they are refocused on managing costs as the best option to improve profitability. For process manufacturers, applying that equation to determine profitable products or customers is not as simple as it seems.”

Is calculating costs the most challenging part of the profitability equation? How does your company handle costing?

Read “Understanding the Cost of Profitability“