Costing Accounting Involves Communication
Jun 02, 2015
Sometimes just talking about things makes it all better. It’s funny because in work and in life we often want to avoid talking about things. Many people avoid confrontation, but event a conversation can be difficult. My 8-year-old is working on listening and I was having a conversation with her about the consequences of not doing so. Then, a few days ago I was doing something with her and typically in such given circumstance she would have reacted adversely. However, she did not! I commended her. She then said to me, “I think you making me talk about things has changed me.” Of course, I struggled to keep a straight face, but it is true. When we talk about things and work them out it is almost always for the better!
The same is true in business. If you have a question about a given subject or want to get more information, go talk to the right person. For example, if you are analyzing variances and the material variance is dramatically different than you would anticipate, what do you do? Do you say oh well, and do nothing about it? Do you talk to purchasing and find out about the materials purchased? Do you talk to production and discuss any issues regarding materials? Do you talk to engineering about possible design changes or issues?
I certainly hope you do not do anything. Doing nothing is never a viable option. Talking to one person or department may lead you to another person or department. Do not allow one department to push you onto another; if what someone says does not make sense then find out why. Make sure you understand before you accept. If another department tells you something that makes you question a previous department, then go back and ask the previous department more questions.
Your goal is to not interrogate everyone but to get the best information and answers possible. Don’t settle for the status quo. You want to make your operation effective and efficient. To do so, you must investigate variances as needed in a timely manner. This will provide you with valuable information. If you wait 6 months to investigate your material variance, you may have just spent 6 months of overspending due to poor quality in your material. Which, by the way, also means your final product may have been of poor quality. Or maybe your machine was broken and causing the material to fail. There could be a number of reasons, but all of these can be catastrophic if left for a long period of time. If you are doing this analysis, every day, every hour, etc. then you can make real-time decisions and avoid any major issues.
Stop staying in your office go out and ask questions and get answers to your questions!
Categories: Cost Accounting
Getting “In Touch” With Your Manufacturing Department
May 29, 2015
I recently taught a course for a group of cost accountants from various industries. Part of the course materials included active involvement by the attendees. Each participant has diverse costing experiences and methods for working through unique problems based on their industry. We believe this to be the best format as it adds value to the entire group.
One of the topics we consider is the need for members of the cost accounting team, in any business, to periodically visit the operations that are included in the cost data and with which the cost accountant is working. We are frequently surprised with our own clients and how out of touch the cost accounting department has become in relation to operational changes. These encompass changes in products and staffing which are part of most businesses ongoing improvement plans.
If your continuous improvement plans are not carefully monitored by the cost accounting group then errors begin to creep into the cost system. These are often caused by unintentional oversights because current developments are not being reflected in how costs are accumulated and measured. The end result is the cost system becomes less and less accurate and, therefore, more and more unreliable.
O
ne of our attendees said that it was a requirement of his job that he spend 40% of his time in the manufacturing area. I was unable to conclude whether that meant he simply had to visit the manufacturing area during his day or if he was actually assigned a permanent working position in the manufacturing area.
We have worked with other business which required the entire cost accounting team to be located in the manufacturing area and not in the accounting department to force them to walk through the manufacturing area upon arrival and departure. This ensured that at least twice a day they would have the opportunity to observe any changes that had taken place. The goal of both of these unique company policies was to be sure that the cost accounting group had access to the most up-to-date and relevant information that was happening in the production department and would be important to the development of accurate job costing information.
We have had other attendees at our cost forums admit they had never been in the manufacturing area associated with the job costing information system with which they were working. I believe those individuals are disadvantaged and run extreme risks of providing inaccurate costing information simply because they are out of touch with what is happening in the day-to-day operations of the roduction areas under their responsibility.
The point to be made on this subject is that the best and most relevant cost information is based on the best and most relevant production processes and staffing levels and that can only be derived by continuous interaction between cost accounting, engineering and production.
Categories: Cost Accounting
A New ERP System – Yes, I Said It!
May 26, 2015
I just taught an 8-hour course on costing accounting in Indianapolis, Indiana last week. It was my first time to Indianapolis and the area which I was located was quite nice. I wish I would have had more time to enjoy the city, but basically was in to teach and then back out again. I did have the pleasure of teaching a great group of people who posed some great questions!
One of the reoccurring themes was ERP systems and companies who were about to, just had, or needed to update their system. Those that made the update told of their journey and the issues to avoid. Those that recognized the need to change felt burdened by their current system and were frustrated that change may never occur. Then, there were those about to make the change. They were optimistic and excited.
The crucial part of an ERP system is your ability work with and in the system. Not outside and around it! The system should make your job so much easier. If that is not the case, its time to fix the issue. The answer is not a new system, by the way. Are the costing standards, assumptions, bill of materials, routings, etc. are set up correctly in your current system? Can you query data and run reports as needed based on different scenarios?
If you said yes, then awesome and good for you! You are in the minority. However, do not slack too much to give yourself a pat on the back. Do you have dashboards? Are you providing the best reports for your team members and in a timely manner? Make sure that you are not leaving anything on the table, challenge yourself.
If you are like most people then you may be saying you just cannot do that and will never be able to. Sure different companies can afford to have different things and your system may not be capable of all of the different things others can, but you can still make it the best possible. Stop using your system as an excuse, make it the absolute best possible. If it will not work for your needs, then maybe a new system is needed.
If you come to the conclusion that the only way to get what you really need is by purchasing a new system, then ok. I’m not saying purchasing a new system is a bad thing, it can be a great thing. If you do get a new ERP system make sure to do your homework and confirm that the system can do what you need and want it to do. Study how you want it set up for every possible scenario now and for the future. This will take some time to do, but spend the time! Research your standards, routings, bills of materials, etc. Make sure everything is updated and input accordingly.
Slacking on the front end of getting information together for your new system leads you to frustration and a huge waste of money on the back end. It is very stressful and you just want to get it done when implementing a new system, but do not slack off. Take the time to understand the system, do the work needed to build the system, and then take the time and money to train on the system continuously.
What are some things that you have learned from going through an ERP system update? Save someone a headache that you wish you would have been spared. And go
Categories: Cost Accounting
What Happened to Variance Analysis
May 21, 2015
A few weeks ago I was talking to a CFO of a publicly traded company about the evolution of cost accounting. We were specifically talking about the change associated with variances. We discussed how variances were once frequently computed, reported and analyzed in detail to help provide management guidance for improvements in production efficiency. Now, this has been virtually put aside for a variety of reasons.
As I think about that change, I’m not surprised management teams of American businesses have not clamored for its reinstatement. Even at the height of its use, I’m not sure how many line production managers actually understood the results of the variances they were creating and how to appropriately manage their departments to minimize the variances and to maximize productivity. The process of creating, calculating, analyzing, and presenting variances is a unique specialty unto itself. Unfortunately, unless the individual departmental managers received specific training related to the variances they were asked to control, I can’t imagine they were very effective. The ability to manage your areas of responsibility with the assistance of properly analyzed variances is a valuable tool. However, if those tools are misunderstood, misused or haphazardly applied, then no favorable results will likely be generated. This will put the entire process in a questionable light as to the benefit to improving the operational efficiencies, and call into question the cost-benefit of maintaining the entire process.
I understand the component of the variance computation and analysis process. It seems reasonable to me. However, the other component of the variance analysis is the ability to properly ascertain that the standards and the rates that are being used and whether or not they represent reality on the shop floor. Companies that have up-to-date standards and rates would very likely create relatively minimal variances related to minor changes in productivity or other fluctuations common in the manufacturing world. However, those companies with out-of-date standards, bills of material, and product routings would have an indication of how far off they are by the magnitude of the variances that are being created.
If standards are being maintained and rates are being updated periodically, and bills of material and routings also concurrently change on the shop floor, then the variances would be relatively minor and would provide assurances that product costing is reasonable with the constraints that the costing system allows it to be.
For instance, overhead application rates may result in the recovery of all the overhead in a fashion sufficient to create a small variance, but does not indicate that the allocation between products, process, customers or plants is accurate and reliable. In today’s world, I see huge discrepancies in product pricing when such assurances would give management at least one level of comfort that what they’re attempting to do is reasonable and prudent in light of total recovery.
In spite of the fact that not all variances are computed in the same fashion as they’ve always been in the past, it would seem prudent that the cost accountant of a company would annually reconcile all variances to actual and look for anomalies that would indicate a fundamental disconnect in the cost model used to cost their products for inventory, for sales, for gross margin analysis, and for other analytical tools important to manage
Categories: Cost Accounting
Having Control of Your Costs
May 18, 2015
I received a question the other day related to internal controls with regards to cost accounting. I found it rather intriguing as typically this is not something you associate together. Internal controls are typically related to accounting principles.
From an accounting perspective, internal controls are related to proper segregation and control of accounting functions. Having the correct internal controls in place not only makes you compliant from an auditing standpoint, but also can safeguard from possible fraud.
I cannot think how internal controls related to cost accounting might have the same effect. There are no GAAP rules associated with cost accounting and internal controls. I do, however, believe it is important to have control over all the costs associated with your business. If you do not know your cost or do not have control of your costs, you may be losing money without realizing. With the proper controls in place to safeguard against such, you may be able to prevent a disaster.
Knowing your costs is extremely important. Recognizing your costs and not maintaining them proves to be useless. Having controls necessary to prevent this from happening and to force reconciliation seems quite logical.
I am curious as to if any of you have any type of internal controls associated with your costing? It does make sense to safeguard your efforts and valuable information.
Categories: Cost Accounting