Every Costing Problem Has A Solution
Sep 23, 2015
I recently met with an experienced cost accountant who offered significant insight. One particular statement which really made an impact was everything is a math problem to be solved. Have you ever thought about your company’s challenges in this light?
I have heard many people say, “my system cannot do that, or we do not have the necessary information. What if every employee thought about challenges as a problem to be solved, like a math problem? What if they actually allowed themselves to try to solve the problem?
I will admit there are times when issues seem impossible and taking them on is so daunting, but what would it look like if you did? Every problem has a solution! Take a step back a look at your company. If you view every issue as having a solution, you will be able to make significant strides in the growth and development of your organization.
The time your boss decided to recover all overhead, resist the urge to reply in haste with “we can’t do that.” Instead, try “even though our system does not provide this information, I will figure out a method to reconcile our system so we can achieve our end goal. Putting forth more effort and taking the time to find a solution can make a huge difference. Stop making excuses and start solving problems!
Categories: Cost Accounting
How to Report Variances
Sep 17, 2015
A few months ago I was teaching a seminar on cost accounting to a group of accountants, most of who worked in the manufacturing industry. Although we had a specific agenda of topics to be covered, there were a number of discussions ignited throughout the day related to costing themes not represented on the agenda.
In my opinion, one of the real benefits of attending a cost-related course is hearing various points of view on a given subject. Typically you obtain information from individuals who have experience in costing and have chosen one method over another as it relates best to their specific circumstances. These discussions can be invaluable for a cost manager attempting to rectify a complicated issue related to their own situation.
During our course, we discussed the variety of method for presenting variances. A participant was particularly interested in segregating his material usage variance into other usage variance and scrap variance. In his case, management was most concerned with identifying and controlling scrap with the hope that unnecessary scrap could be reduced or eliminated.
Management’s request would 
require periodic measurement of actual scrap and the creation of standard scrap levels for the purpose of determining a goal. Since control and improvement were the ultimate reason for this change, the quicker one could identify when the scrap was occurring in the details of the process, the sooner controls could be placed on the cost.
Specifically, this participant was working to identify scrap by shift with the ultimate goal of identifying scrap by the job per shift. Such precise identification of scrap would require much-improved accounting procedures and modifications to operations to identify the causes and amount of scrap being created in a 24-hour period. This computed variance must be frequently reconciled to the overall usage calculation to ensure the cost system and the shop floor accounting system is producing accurate results.
In this case, the management team was satisfied with the results by shift and confident in the accuracy enough to gain the control necessary to identify the causes for the excess scrap. However, there was a concern about the additional time and effort it was going to take to monitor scrap by job, particularly in those areas where job changes occurred frequently during the day and there was a low volume, high turnover of manufacturing parts.
This discussion prompted other dialogs about how variances may be differentiated into subcomponents including labor variances analyzed between direct labor and set-up labor, or perhaps labor segregated into set-up, quality, and production. The methods for determining overall cost and efficiency variances is only limited by the needs of the manufacturing team and the cost accounting system which supports the manufacturing area and the cost accounting process.
Have you attempted to apply different analysis with regard to scrap variances? What have you done? Anytime you have the opportunity to talk to others about what they are doing related to costing, take it!
Categories: Cost Accounting
How Much Can You Query Your Costing Data?
Sep 15, 2015
How much does it cost to make widget xyz? What costs would we save if we stopped producing it? How much overhead is this product absorbing? What if we decided to buy the product instead of make it? If you are like any other cost accountant, a member of your team has posed these very questions.
Depending on the sophistication of your system and your ability to plan ahead, you are either very uncomfortable right now with a knot in your throat, or you are feeling at ease saying I got this. I hope you are the later. However, I fear many of you are the former.
First, we need to know what costs we are considering. When making a part are we talking fully loaded or just direct costs? If you stop production on a given product to save money, then you are absorbing some overhead with the production of that part. How much absorption is important. There are additional questions associated with this as well. For example, at what level of capacity are you operating and can you replace the volume from widget xyz with another part?
It is vitally important to understand the appropriate scenarios and circumstances when determining the status of your operations. We cannot and do not work in a vacuum, but when we are tasked with a specific question we need to define the necessary parameters. This may require making assumptions.
Once you have determined your parameters, you should be able to efficiently obtain reports wth all of the necessary information. I believe this step is where many manufacturing operations have difficulty. Some organization may not have a system capable of reporting such. Other management accountants fail to think proactively and do no prepare the system to offer such data. It is your job to query your data through your system and provide reporting with just direct costs, or overhead, etc. If you did not structure your system in a what that the information is easily segregated, it can be almost impossible to be confident in your numbers. You may try export it to Excel and attempt to manipulate the data, but your chance for error is much greater.
Certainly, if you are getting a new software system or looking to update your current costing system then consider setting up your BOM in such a way that a query of data is easily available.
Categories: Cost Accounting
What Is An Acceptable Variance?
Sep 11, 2015
One of the most common issues we observe in our cost work involves companies which are producing very large variances related to direct costs or overhead, without much interest related to how those can be controlled or, for that matter, what they even mean.
Many systems utilize their own cost information for inventory valuation which can lead to large variances in materially misstated inventories. If your variances are offsetting and similar in proportion, then the risk of your inventory being significantly over or under- valued is reduced. This is especially true given the presumption that the only number which really matters in the scenario is the total cost as computed by the costing system. Only if it actually equates to the total cost of the product. For these purposes, it does not matter that one cost category is grossly understated and another cost category is grossly overstated, as long as those two approximately net out to the same result. This resolves to maintain inventory values in a reasonable range.
Unfortunately, this scenario is very rare. It is far more likely that there are very large variances (sometimes over 20%) with little concern from management relative to how it will affect any other part of the operation. In my view, if you have a fully functioning cost system (used to value inventory, determine product, customer, or plant profitability and/or used for managing operations), then variances of this magnitude cannot be tolerated and must be investigated and resolved as quickly as possible.
As I think about this fact pattern, it is obvious that large variances indicate the cost to produce them are materially in error and will result in introducing inaccurate or incomplete information. If the variances are left to continue without any attempt to analyze or investigate, then management is not doing their job.
I don’t believe cost systems should operate without any variances. In fact, I believe a properly functioning cost system will always produce variances in relationship to actual operations. This is true simply because there is not a single operation so dependable that it functions 100% at all times on all problem products. However, large, reoccurring, uninvestigated variances indicate a fundamental problem in the costing system. Such dilemma must be investigated and resolved before any true reliance can be placed on those numbers, no matter what the intended use.
When questioned about what is an acceptable variance, I have always used this rule of thumb: when total variances considered cumulatively exceed 10% of the cost of sales, then actions must be taken to investigate and correct those problems.
I have had managers say 1% per month positive or negative will be acceptable and their goal is to keep the cumulative variances under the average of 1% per month for the entire year. Regardless of what your company goals are for the tolerance of variances, it is my suggestion when cumulative variances exceed 10% for the entire year, they must be investigated and resolved before beginning the next year. Doing this will be very crucial, specifically so that any known deficiencies are corrected before beginning the next accounting cycle.
Categories: Cost Accounting
Bottlenecks: Avoiding Inefficiencies
Sep 08, 2015
I met with a friend several days ago and we talked about his business and the current issues he is facing. He said one of his biggest challenges at the moment has to do with bottlenecks. There are times when his crews must wait for a specific cast to be completed before another part of the operation can be completed. This is extremely frustrating given then fact that he carefully considers all aspects of production when determining their schedules.
What could be causing this bottleneck? Are his 
production schedules accurate? He went on to explain he quickly realized the issue when he met with the head of the department responsible for making the casts. The manager did not believe in a schedule and preferred to run the line according to what he felt was best. My friend explained to this manager the importance of following the schedule and the effects it has on the total production process.
After a lengthy discussion, the manager understood why the schedule was necessary and he bought into the idea of being a team player. I the owner if he considered tying incentives to timely production. He admitted he had never given thought to such an idea but was excited about the possibility.
What are some other ways to help prevent bottlenecks? Where do you currently have bottlenecks or did you in your operation? What have you done or would you like to do?
I personally believe one method to responding is to tie performance to incentives. Another way is to do as my friend did through production planning. Maybe consider re-arranging your factory. If the cause of the slowdown is due to movement of material, then organizing a factory to be more efficient may be the answer. Another would be to talk to engineering, maybe the issue can be re-evaluated and production efficiency restored to save time and effort.
I hope to hear from you on ideas you have or any concerns you may have as well.
Categories: Cost Accounting