A How to Guide to Solving a Costing Problem

It is very common for us to run across cost managers that believe they are dealing with a problem associated with their cost system that needs to be addressed so that the cost results will be useful and accurate for all those management members using reports from the costing system.

These perceived problems can range from something extremely complicated in nature to something very simplistic. If you are facing such a problem or series of problems it would not be uncommon for a cost manager to wonder where to begin to address these problems.

My first suggestion would be to determine is there really a problem? I know that sounds too simple, but it is my experience that senior management does not believe or accept the results of the cost system. Therefore, they translate their lack of trust, understanding, or confidence to a perceived problem in the system. This is not to say that all cost problems are only perceived by management, but the first place to start is with the credibility of the system and with its users. If that is the underlying issue then comprehensive changes may not be in order but rather a thorough review and educational process to get the entire management team up to speed as to what the cost system can do and the foundations for its workings.

However unfortunate it might be, many times an outside consultant coming before the management team and endorsing the system is all it takes for the existing cost system to be accepted. I cannot tell you how many times in the past we have been called upon to review what is presented to us as fundamental cost accounting issues only to find out that the real problem was that management did not understand or appreciate the depth of their system. After our review we proposed modest changes, but the foundations of the system were functional and were accurate and although almost every cost system in the world can be tweaked for more performance, the fundamentals were there.

However, what if this problem is not perceived and it’s real. How do you know that it's a real problem? Some of the warning signs may include:

  1. The system is so complicated that no one can see through the results back to the beginning.
  2. Changes on operational processes result in counterintuitive results on the cost system.
  3. All of the costs that could be recovered are not being recovered.
  4. Unresolved variances are being created every month without a thorough understanding of
  5. what causes them or how to fix it.
  6. The company’s job estimating processes result in the loss of many orders to competitors.

Inventory fluctuations result in radical changes in gross margin without a thorough understanding by the management team as to what is the problem.

This is just a small list of the kinds of problems that can be created by a nonfunctioning cost system.  If you are experiencing any of these problems or have other similar problems, its likely that you have some sort of cost accounting problem.

If that is the case, then what do you do if you have tried a number of solutions on your own and have been unable to solve the problem or get to the issue? Perhaps someone who is familiar with your costing methods can help shed some light on the problem.  From our past experience, an knowledgeable cost consultant with a diverse background in a number of different industries may be able to quickly determine where a system might be at risk for being nonfunctional.

Struggling with cost system problems for years is a very common problem in today’s manufacturing world.  It is unfortunate because in many cases there are cost effective solutions that do not require major investments in hardware or software to have radically different and far more successful results.

Categories: Cost Accounting