Accelerate the Adoption Rate, the Adoption of Change
Apr 21, 2014
Gary Cokins is a longtime proponent of change in the field of management accounting. His most recent blog focuses on why organizations are just not making the leap to adopt the proven value added practices of using analytics to drive the actions of the organization in tandem with the Company’s overall strategy.
We here at William Vaughan have asked that same question repeatedly, especially when it comes to product costing and budgeting. I have met with so many companies and spoken with Controllers and Cost Accountants and CEO’s about major problems the team is facing. The list of problems cannot specifically be duplicated from company to company, but in very generic format, the problems are the same:
- There is an overall lack of credibility and understanding of the financial reporting
- The team spends a great deal of time working “outside” of the systems (software) to do analysis and financial reporting (NOT management reporting) and essentially provides data that is inconsistent at best and confuses management more than anything else
- Too much time is spent looking at the wrong information
- There is a lack of meaningful financial planning. The vast majority of the time if there is planning in the form of a budget, and yes, the kind that is based on last year’s information multiplied by 3% with a few changes and NOT linked to any type of Company wide strategic plan.
Gary indicated that he believes the solution to accelerating these changes involves behavioral change management. I always use to think that if you showed the team the unequivocal benefits of making these changes, then it was a no-brainer. I was wrong, and Gary is right. I can talk until I am blue in the face about how wrong your numbers are, how misleading your spreadsheets are, and even tell you that your Company is going to go under in less than a year if you keep doing it the way you always have been. You won’t change unless you are ready.
The book “Change or Die” by Alan Deutschman is a great read if you find yourself identifying as “one of those Companies that needs to change or wants to change” but just cannot. The statistics he cites are jaw-dropping- even when faced with possible death, 9 out of 10 people DO NOT CHANGE their lifestyles or behaviors! If an individual has such a hard time making a change, how can you get an organization of people to do it? The concepts Deutschman presents make sense: there has to be great commitment, a relationship that inspires support, short-term wins to see success.
Gary is right- while technology may be an impediment for some- change management is the real issue. Time to hire an in house psychologist?
Categories: Cost Accounting
More Than One Standard for a Job
Apr 14, 2014
I was reading an article the other day about businesses that have multiple standards for the same cost band for the same exact job. This discussion was not related to multiple costs for the same product, which I think is essential in today’s business environment, but rather, why a business might need more than one standard for the same item in a products bill of materials. The concept that a business might use more or less of one resource in the manufacturing of a part has always presented an interesting quandary in management accounting theory.
The way I see this occurring most frequently is related to the same part that can be run on different machines. A company might have the same exact part that can run on the latest, most productive, most highly efficient machine in the shop and it also can run on the slowest, least productive, oldest piece of equipment in the shop. The company has the tooling it would take to run it on either machine and the quandary facing the cost accountant is how do I cost that part. Does he or she cost the part based on always running it on the most efficient machine and then when it runs on the slower machine it does not prove to be as profitable. Or does the cost account cost the product to run on the slowest machine, then when it runs on the faster machine it is more profitable than when it runs on the slower machine. I’m sure there’s abundant management theory on how that costing analysis should be completed but my advice has always been cost the product on the machine it is most frequently scheduled to be produced on. In doing this you will be costing the product with the highest degree of reality.
This article that I was reading is actually oriented more towards the purpose for having different standards for the same job. They mentioned material and how there might be a use for more than one standard on material usage. I find that to be somewhat quizzical in that raw material usage is usually a very defined quantity with clearly defined costs.
My only thought on that process is that perhaps in the company’s inventory of raw material there is more than one type of material, with differing cost of course, that can be used to make this part. Accordingly one type of raw material will be at a somewhat greater or lesser quantity than another type of raw material simply because of the different types of material that are being used.
Irrespective of the nature of the cost system that you use, I believe every cost system somewhere has a standard cost sheet or a bill of materials that represents the normal usages and costs of the product that is being produced. The fact that there may be multiple standards for the same product with the same raw material going through the same process seems to me to be difficult to administer and must be the result of very specific needs in the company with the desire for very specific output at the time the jobs are being analyzed.
Categories: Cost Accounting
The Importance of Coming Together
Apr 11, 2014
Have you ever watched any of those home improvement competition shows where they are under a tight deadline to remodel a room, or sometimes an entire home? Well if you have, you know they often times fear they are not going to finish on time. Sometimes they are right and they must prioritize what is the most important. Other times, they keep working together and as a team they are able to get it done. The ones that do not seem to complete their task are the ones that do not get along and refuse to work together as a team. Here at William Vaughan Company, we are at the very end of tax season and like every year, I find myself saying everything is not going to get done. I just cannot imagine how it will! I am yet again, wrong! Everyone is pulling together as a team and is putting in the necessary hours to work to get everything complete, while maintaining the quality we are known for.
What is it like for you? Do you run as a team, a well-oiled machine? Or are you constantly in opposition of one another and fighting each other with little effort left to complete the task on hand? If you are trying to reconcile your cost, it requires information from various departments and people. For instance, if in your reconciliation you see that you used more material than you expected, you need to talk to the materials manager and ask them why this was the case. Maybe the machine was breaking the material, maybe the quality of the material was poor, or maybe you produced more. You cannot know the answer to the questions without talking to others and working together!
At the end of the day the goal is to keep the business running as smoothly as possible. Sometimes there are conflicts that need to be resolved. But taking the time to understand each department and their role and working together for the good of the business is crucial. Also it is vital to recognize when everything that needs to get done truly is not going to and what needs to take priority in order to get the most crucial steps complete. During this time communication is KEY!
I would be interested to hear your examples of times when you have worked together, or times when you have not. I am proud to say we are all working together here and getting everything done!
Categories: Cost Accounting
Management Accountants: Thinking Outside the Box!
Apr 07, 2014
I have been working in a public accounting firm for 21 years. Although I am a CPA, I am also a CMA. When I give my 30 second “about myself spiel”, those who have already heard, know that I never really cared for preparing financial statements or tax returns. Not really the best asset for a CPA firm, right?
Well the rest of my spiel is that, shortly after earning my CPA and my MBA, I earned my CMA. Eighteen years ago that was almost unheard of for practicing CPA’s and many did not even know what it meant. Now the designation is more common, generally with accountants in industry, not public accounting firms. Every single consulting job that I perform that falls under this umbrella of “Management Accounting” is unique and intriguing to me. Whether it’s data analysis, forecasting, product costing, or simply assisting management with financial oversight, it is always new and thought provoking. One of my very first blogs was about “playing by the rules”. Over three years later, I believe it to be true more than ever. To be a true management accountant, you must be very good at working without rules, without structure, without a framework, you must be able to think out of the box!
In the past few years, many governing bodies have tried to put a “framework” around the practice of management accounting. From my perspective, this is nearly impossible. When I try to apply rules to the engagements that I perform, it does not work well. According to Wikipedia,a “simple” definition of management accounting is: the provision of financial and non-financial decision-making information to managers. That is about as vague and broad as you could possibly get.
According to the Institute of Management Accountants (IMA): Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy.
Very well thought out definition that applies many of the thought concepts that I deal with daily.
The American Institute of Certified Public Accountants (AICPA) has its own definition, as does the ICMA (Institute of Certified Management accountants) and the list goes on. I am going to go out on a limb here and say that NONE of these definitions has it right on the money and I don’t believe the process can ever truly be defined in just a few sentences. They all address characteristics of a successful management accountant. I believe each of these bodies can continually draft their version of a definition for a management accountant or for “management accounting” as a profession, but it will never be precise; it will never be entirely accurate.
A true management accountant can AND should analyze EVERYTHING in so many different dimensions. This includes historical information: company, financial, industry, geographic and projected trends in the future related to the same dimensions. They analyze financial data and non-financial data. They know operations and try to quantify impacts of everything from non-value added activities to purely developmental to the operations themselves. They act as interpreters for those who don’t understand numbers and how they impact operations. They act as the liaison between the financial accountants and operations and operations and management. They are databases of information for the design engineers and the salespeople. They are the report designers, generators AND translators for the flavor of the day. They ARE the strategic business partners; and EVERY situation they face is unique, sometimes intimidating, always challenging, and provides an opportunity to think out of the box, and help the organization grow and succeed to achieve its overall vision.
Categories: Cost Accounting
Costing for Inventory Valuation Only
Apr 03, 2014
As a costing consultant I am constantly looking for new and better ways to help people identify and measure their costs related to their products or operations. In virtually every case, I’m seeking to offer the best solution, one with multiple functions and that provides maximum usefulness to the management team. Costing systems can be complex and expensive, or they can be simple and inexpensive. The goal, however, is always to provide the most versatility and the highest functionality in the most cost-effective way.
What if all your business really needs is the ability to quickly and reliably value your inventory at the end of every month or year. Many of our past cost forum attendees came from businesses that the primary function of the costing system was to accurately value inventory. In many cases, the inventory valuation method was primarily focused on passing the year-end audit testing with far less consideration to management reporting. Accordingly, all the bells and whistles available in a comprehensive cost system were of little interest to the cost managers that were directed to provide the best inventory valuation method they could.
This is not to say that just any method is acceptable for valuation of inventory. In fact a properly constructed inventory evaluation method provides alternatives for valuing inventory under Generally Accepted Accounting Principles (GAAP), as well as, the alternative for valuing inventory under today’s federal income tax rules. The computation of variances or other management information is not necessary for a system that is designed to do just inventory valuation.
It has been my experience that poorly constructed cost systems can be one of the root causes of radical fluctuations in inventory. I can cite numerous examples in my personal experience where overly simplified inventory valuation methods or perhaps improperly constructed valuations systems have led to multiple problems in determining month-to-month profitability of an operating company with little obvious indication as to what really was causing the problem.
If your goal as part of your cost management responsibilities is to simply value inventory, then I would first look to GAAP to provide guidance relative to what must be capitalized as inventory costs and what must be expensed, as well as how to deal with material differences between what was planned to be recovered in the costing process and was actually recovered. Further, I would look to income tax code section 471 and 263A to determine what must be capitalized for tax purposes. There, of course, are differences, and if you are aware of those differences at the outset of the design of the system, then you can design your costing model with both alternatives. This allows for your year-end inventory to be computed first for GAAP purposes and a second time for tax purposes. However, do not lose sight of making sure that you are meeting the management accounting goals as well.
Categories: Cost Accounting