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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2 Comments

  • Ron Ferro
    Posted July 20, 2011 at 4:10 pm | Permalink

    I enjoyed the articles and discussion about the Three Requirements for Effective Cost System, and it is good and beneficial to have that understanding. At this time most companies have made the investment in good, solid integrated systems. Being involved in the selection process is becoming more and more remote even for start-up companies. There is so much available today compared to 10 or 15 years ago that can be purchased right off the shelf, or downloaded to your PC, it’s just amazing.

    I think today’s challenge, new roles and responsibilities for the cost accounting/manager is what do you do when you come on board to a new company and find that their cost modules and feeder modules are not in the best shape due to high employee turnover, poorly documented process and procedures, questionable accuracy in product structures, lost knowledge because the key person left with everything in their head, so on and so forth. Their current system could be more than adequate for reliable costing, so to bring in a new system following all the parameters of world class selection, implementation, consensus, team building, employee buy in, and user training, etc. is neither practical nor cost effective. Where would you start to clean up the mess, reestablish confidence in financial/managerial reporting, and functionality maximization?
    The role and responsibilities of cost accounting are in flux. Moving from setting pricing, calculation of labor, machine, the various absorption and allocation rates; capacity analysis, variances and all that other financial stuff (that’s really technical jargon), to being the systems savvy – knowledgeable in all the detailed relationships of all the various modules, knowledgeable in system’s configuration matrix, linkage between feeder systems from when raw materials purchase request is generated, receipt of purchases into receiving dock, creation of accrued liabilities and vendor detail files (accounts payable), MRB, vendor returns or replacement, stock movements, issuance, what stock movement transaction do or effect (expense, WIP, projects, CIP, internal orders), how cost move, financial transactions written, general ledger and sub system posting; valuation methodology and those interactions, subcontracting activities with all those possible transactional combinations, feeders for reporting and recording labor activities, system validation processes, associated general ledger posting generation, reconciliation between payroll and labor tracking integration, and on and on until recording of revenue, cost of goods sold, and data warehouse reporting.
    Unlike the general ledger or staff accountant and manager who focus is account posting accuracy and balancing to supporting schedules – right or wrong it does matter as long as it balances. Cost Accounting has greater financial responsibility, responsibility for the cohesiveness of the system. More so than IT, because it is the Cost Accounting group who is the watchdog of the transactional interactions, stability of master data, cost validation and determination, viability of MRP structural modules. This is our new domain.
    You can get a cost accountant to do the staff accountants and general ledger accounting and financial reporting functions; but it is more difficult to have them do what the cost accountant does.

  • Ron Ferro
    Posted July 20, 2011 at 4:10 pm | Permalink

    I enjoyed the articles and discussion about the Three Requirements for Effective Cost System, and it is good and beneficial to have that understanding. At this time most companies have made the investment in good, solid integrated systems. Being involved in the selection process is becoming more and more remote even for start-up companies. There is so much available today compared to 10 or 15 years ago that can be purchased right off the shelf, or downloaded to your PC, it’s just amazing.

    I think today’s challenge, new roles and responsibilities for the cost accounting/manager is what do you do when you come on board to a new company and find that their cost modules and feeder modules are not in the best shape due to high employee turnover, poorly documented process and procedures, questionable accuracy in product structures, lost knowledge because the key person left with everything in their head, so on and so forth. Their current system could be more than adequate for reliable costing, so to bring in a new system following all the parameters of world class selection, implementation, consensus, team building, employee buy in, and user training, etc. is neither practical nor cost effective. Where would you start to clean up the mess, reestablish confidence in financial/managerial reporting, and functionality maximization?
    The role and responsibilities of cost accounting are in flux. Moving from setting pricing, calculation of labor, machine, the various absorption and allocation rates; capacity analysis, variances and all that other financial stuff (that’s really technical jargon), to being the systems savvy – knowledgeable in all the detailed relationships of all the various modules, knowledgeable in system’s configuration matrix, linkage between feeder systems from when raw materials purchase request is generated, receipt of purchases into receiving dock, creation of accrued liabilities and vendor detail files (accounts payable), MRB, vendor returns or replacement, stock movements, issuance, what stock movement transaction do or effect (expense, WIP, projects, CIP, internal orders), how cost move, financial transactions written, general ledger and sub system posting; valuation methodology and those interactions, subcontracting activities with all those possible transactional combinations, feeders for reporting and recording labor activities, system validation processes, associated general ledger posting generation, reconciliation between payroll and labor tracking integration, and on and on until recording of revenue, cost of goods sold, and data warehouse reporting.
    Unlike the general ledger or staff accountant and manager who focus is account posting accuracy and balancing to supporting schedules – right or wrong it does matter as long as it balances. Cost Accounting has greater financial responsibility, responsibility for the cohesiveness of the system. More so than IT, because it is the Cost Accounting group who is the watchdog of the transactional interactions, stability of master data, cost validation and determination, viability of MRP structural modules. This is our new domain.
    You can get a cost accountant to do the staff accountants and general ledger accounting and financial reporting functions; but it is more difficult to have them do what the cost accountant does.

Comments