May 5, 2015
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.
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