Change A Number, Change Views

Mar 10, 2014

Even though my true passion lies in costing models and the profitability of businesses, during tax season I must return to my true job, tax returns! This week, I made a mistake. Well, actually two! I am sure I made more than that, however, these two tax related seemed to be so colossal in nature that it was almost hard to recover mentally.

Fortunately for me, at the end of the day the mistakes were really just a “position” and had I taken a different position, there would have been negligible positive or negative effects to the business and owners. In short, I could file the taxes taking various “positions” and in this particular situation, there was no net effect. However, with another client in another situation, the results could have been vastly different. I was lucky. In the meanwhile, it took a short while to sort out and I couldn’t help but feel like it is somewhat of a game.

Numbers, a game? Let me quote something I read from Reginald Tomas Lee, “you must live with the fact that another equally valid approach will calculate a different number, leaving confusion about which number is better.” He is referring to the fact that a Company can calculate a product cost using many different methods, and come up with many different results. He then goes on to question the ability to trust any number when faced with such results.

I agree with him wholeheartedly. We continually work with new companies that are struggling with costing issues. They have outdated systems, their method of allocating costs is antiquated, their logic does not make sense and no one can understand it. This list of issues could go on. What I have found nearly every time I consult with one of these companies is that trouble comes when ONE number in the cost model is changed (because someone has a new idea) and the product costs change drastically. It just does not make sense. Usually it’s because the cost accountant decided to “allocate” the fixed costs using some NEW method that makes more sense than the old one did.

I often tell companies that trying to come up with a cost model is not a “one size fits all” consulting job and what Reginald is saying proves it. While he advocates a complete change in theory, gravitating away from a “cost model” per se, the bottom line is still the same: the analysis of what costs you are incurring to achieve your intended results can only be viewed and altered from your vantage point. If a “new viewer” (CFO, Controller, Cost Accountant, Plant Manager) participates, most often the analysis gets reworked. Hence, Reginald’s quote, “someone else’s view might make just as much sense as his predecessor, yet yield insanely different results.”

While I am relatively new to these concepts, they definitely have merit, and should be considered before changing your NEXT vantage point.

Categories: Cost Accounting