The Evolution of Costing Accounting and What Does It Mean For The Future?

One of the topics frequently brought up in my conversations with cost managers is the delayed conversion by today’s manufacturers to alternative costing methods. There seems to be a general lack of willingness for today’s businesses to consider changing their methods of costing to something that is perhaps more suitable to their needs.

I am constantly amazed by the number of very successful and technically advanced businesses which continue to employ costing models that were developed 40 or 50 years ago.

The IMA has completed formal research regarding common costing systems utilize in contemporary manufacturing companies. It is my recollection that close to 80% still use standard costing for their method of product costing, as well as valuing inventories. Based on my personal experience, I believe the percentage to be much greater as I rarely hear of organizations that are not using standard costing. Many businesses have attempted other methods, more specifically those that have converted to activity-based costing 10 or 20 years ago. However, almost all of them abandoned the system due to the complexities in maintaining ABC. I have heard of other companies that have actually developed two systems: one system to determine product cost for profitability and the another simply for the purpose of valuation of inventory.

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I believe in the second case that is overkill. I understand the desire for accurate and timely cost information but the expense and necessities of maintenance that go along with maintaining two systems is certainly onerous and probably not necessary if the one system is designed with enough versatility.

The real question is why are companies continuing with standard costing when there are other methods available? I believe the answer lies in several common themes. The first is that business managers must have, at least, a rudimentary understanding of their cost system to be able to utilize it effectively. Many of today’s managers started their careers with standard costing systems and, as a result, have become comfortable. To suggest a new approach is not well received.

Secondly, I believe standard cost is viewed as being a relatively simple system which is easier to implement and sustain. Therefore, it is labeled worthwhile for those purposes alone.

Thirdly, product costing and overall costing techniques have been de-emphasized over the last 20 years for reasons I do not fully understand. I imagine the amount of resources devoted to accurate product costing in today’s society is just a fraction of what was required 30 or 40 years ago which could explain why companies have de-emphasized the need for costing information. To me, this signifies that today’s manufacturing managers have found other methods of handling production.

I continue to hear over and over that the main purpose for modern costing is simply for inventory valuation. In my mind, this change is by far the most significant cause for the de-emphasis of new and robust cost system and management’s unwillingness to consider the investment of resources it takes to make that conversion. As I work in this arena more and more, I have come to accept the status quo and am now more concerned about getting American businesses to get their standard cost systems working.

What have your experiences been? What is the purpose of your cost system and does it get the attention it requires? Check out our blog dedicated to cost accounting, Costing for Profitability.

By: William J. Horst, CPA, CMA, CGMA

Categories: Cost Accounting, Manufacturing & Distribution

Don’t Miss Out on Ohio’s Workforce Training Voucher Program

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The Ohio Workforce Training Voucher Program is now in its third year. This employer-driven program is targeted to provide direct financial assistance to train workers and improve the economic competitiveness of Ohio’s employers. The program is designed to offset a portion of the employer’s costs to upgrade the skills of its incumbent workforce and will provide reimbursement to eligible employers for specific training costs accrued during training.

This time around businesses will have a chance to claim a piece of $29.4 million. That’s the good news. The bad news however, is that you have to be quick if your business has a desire to claim any portion of these funds. Similar to round two of the program, a pre-application process is available. The period to complete this process began Sept. 15, and will continue until the application officially goes live on Sept. 30.

According to the state, the funds are to be made available on a first-come, first-served basis. Employers can apply for a credit that will reimburse them up to 50% of eligible training costs – which could mean the business could be reimbursed up to $4,000 per employee.

In order to qualify, training must have been performed between Aug. 1, 2014, and Dec. 31, 2015. Employers have the option to apply for vouchers for training that has already occurred.

Pre-application allows employers to enter as much information and specific details as possible. When the application goes live, all you need to do is log on to your account and submit it. We expect all funds to be accounted for within the first few hours of the application going live. We urge businesses to take time to complete the pre-application process as soon as possible.

What Is Considered Eligible Training? • Classes at an accredited education institution • Training that leads to an industry-recognized certificate • Training provided in conjunction with the purchase of a new piece of equipment • Upgrading computer skills (e.g. Excel, Access) • Training for the ICD-10-CM/PCS diagnostics classification system • Training from national, regional or state trade associations that offers certified training • Training for improved process efficiency (e.g. ISO-9000, Six Sigma, or Lean Manufacturing) • HR Certification – limited to HR staff only

What Companies Can Apply? For-profit entities located in Ohio and that operate in one of the following industries are eligible to apply for the Incumbent Workforce Training Voucher Program:

• Advanced Manufacturing • Aerospace and Aviation • Automotive • Bio Health • Energy • Financial Services • Food Processing • Information Technology and Services • Polymers and Chemical • Research and Development • Companies with a Corporate Headquarters in Ohio (with limited availability of funds)

Categories: Manufacturing & Distribution

Managing Costs for a Healthier Bottom Line

profit_from_returnsYour company’s profitability depends not only on sales, but also on effective cost management. Are you adequately addressing the cost side of the business equation?

Analyze Your Cost Structure. You probably can readily identify the products and/or services that are generating your greatest sales volume. But can you identify all the costs associated with providing each product or service? Only when you know your true costs can you effectively allocate resources to the work that is most profitable for your company.

Actively Monitor Operations. As the busy owner of a small business, you can’t be everywhere all the time. But you do need to stay in circulation, regularly observing the day-to-day operations of your business and talking to your managers and employees. By staying visible and encouraging an open dialogue, you’ll be in a better position to uncover costly problems before they seriously erode your company’s bottom line.

Solicit Bids. Even if you are satisfied with a current vendor, you may want to talk to the competition from time to time. You won’t necessarily want to switch vendors simply because you are quoted a better price. But you may be able to use that price in negotiating more favorable terms from your existing supplier.

Watch for Discounts. In the interests of cash flow, your company may routinely pay its bills only when they come due. While this generally is a sensible strategy, it may not be wise if you are passing up generous cash discounts for earlier payment. In the current low interest rate environment, borrowing the funds you need to take advantage of discounts may be a better move. For example, suppose a vendor offers your company a 2% discount for paying a $10,000 invoice 20 days early. Passing up the discount will cost you $200. Instead, you might borrow $9,800 from your bank, pay the discounted invoice, and repay the loan in 20 days. If the rate on your bank line of credit is 8%, you’ll owe about $45 of interest — for a net savings of $155 on just one invoice.

Effective cost management requires good information and careful planning. Our team of costing accounting experts can help you identify your pitfalls and help you clarify yours costing system.

Categories: Cost Accounting, Manufacturing & Distribution

Forecast or Projection – Who Cares?

shutterstock_130753661Have you heard people use the terms forecast and projection interchangeably? Maybe you’re one of those people!  There actually is a significant difference between the two terms.

forecast is based upon assumptions reflecting the conditions the business expects to exist and the course of action reasonably expected to be followed.   A forecast can utilize a specific monetary amount or a reasonable range based on the various assumptions in place.    This information is not restricted and it is typically what is published to the general public for publicly traded companies.  Management expects the goals in a forecast to be met and believes them to be reasonably attainable.

projection is prepared to present one or more hypothetical courses of action that the business might follow.  It is typically prepared for a restricted specific party, often internal management. This type of analysis can definitely be thought of as less realistic, even referred to as “pie in the sky”.

A fun way to remember the difference is that a weather FORECAST is for everyone and the weatherman believes the results to be attainable.  The main difference between a forecast and a projection is the nature of the assumption; in a forecast, these assumptions are based upon specific fact patterns, making it more representative of the expectations for actual future events.  However, in a projection the assumptions are more of the desired scenario, not necessarily what is most likely to occur.

Keep in mind neither a forecast nor a projection is a budget.  A budget sets the requirements for the period of time, where a forecast is an expectation of what is likely to happen, and a projection is what you would hope to happen.

So why does it really matter?  Who really cares?   Management, investors, lenders….all involved parties do, which means YOU SHOULD!   If you are a publicly traded company and you do not understand the point of a forecast and you release poor data it will affect your stock prices and ultimately the viability of your company.  Even if you are not publically traded a good clear forecast helps bridge the gaps between the strategic plan and the operational budget.   An accurate forecast will mathematically quantify how it is possible to attain the goals you have set.    A projection, although mainly for internal use, is intended to present a clear picture of those “what-if” questions that management is always asking.  It can help make determinations on new product lines, major customer decisions to acquire or dispose of, labor decisions, the list can go on.   It is important that effort is put into a projection to see the range of outcomes for every scenario.  It is easier to implement ideas and proactively manage to the plan in place rather than react unsystematically to unforeseen circumstances.

Both forecasts and projections have a definitive place in effectively managing your business.  Make certain that you understand the purpose and process for each, and that you follow the decision making process required to make them valuable tools to drive the future profitability of the business.

By: Tara West, CPA

Categories: Manufacturing & Distribution

New Ohio Worker Training Program Announced

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Overview. The State of Ohio has launched a new program to train Ohio's workforce: the Ohio Workforce Training Voucher Program. This employer-driven program is targeted to provide direct financial assistance to train workers and improve the economic competitiveness of Ohio's employers. The program is designed to offset a portion of the employer's costs to upgrade the skills of its incumbent workforce and will provide reimbursement to eligible employers for specific training costs accrued during training. Eligible employers must demonstrate that by receiving funding assistance through the program that their business will not only obtain a skilled workforce but will improve their company processes and competitiveness. All training must begin and be completed between February 2, 2013 and June 30, 2013.

Eligibility. Eligible employers will be capped to $500,000 for training of employees who work at least 25 hours per week and earn at least 150 percent of the federal minimum wage. An employee must also be an Ohio resident and at least 18 years of age. Employers are eligible for reimbursement of up to $4,000 per employee for training qualifications such as industry-recognized certificates, improved computer skills or training from a trade association. Funds cannot go toward a GED, conference fees, management and/or leadership classes.

Eligible companies must be a for-profit entity and must fall into one of the following ten targeted industries:

  1. Advanced Manufacturing
  2. Aerospace and Aviation
  3. Automotive
  4. BioHealth
  5. Corporate Headquarters
  6. Energy
  7. Financial Services
  8. Food Processing
  9. Information Technology and Services, and
  10. Polymers
This credit is on a first come, first serve basis. Interested employers are urged to act soon. Contact your William Vaughan Company representative today.

By: Katie Mokry, Senior Accountant

Categories: Manufacturing & Distribution