Cost System Updates: Avoid Letting The Tail Wag The Dog
Jan 18, 2016
I recently met with a client who is interested in updating their costing model. The organization currently has an excellent model which we helped create several years ago. However, some of the company’s processes and procedures are being modified and management recognizes the need for a cost system update.
Reviewing your costs system is essential, but it is even more important when changes to your operations occur. For instance, if you begin manufacturing a new product, or if you change the method in which a product has traditionally been made. Chances are your drivers and your allocation bases will not be as accurate.
In this particular example, the client recognized the need for system revisions given the changes in processing. They were considering producing certain products in a different manner than previously executed. The company’s current costing model displayed data stating it would be too expensive. The company questioned the data’s accuracy and wondered what it would actually cost?
An inaccurate costing system may oppose the production of an item in a particular method, but the information may be incorrect. The tail may be wagging the dog in this instance. These critical decisions cannot be made until the system is updated and accurately costing processes.
It is important to continuously review and improve your cost system. If report data does not seem realistic or accurate, take the time to review your system and make necessary adjustments. After all, an inaccurate cost system is not very useful! In addition, it is essential to evaluate the driver and allocation bases on an annual basis.
In the end, make sure you have established a reactive cost system, one which involves critical thinking about the outcomes you desire. Don’t let the tail wag the dog. Be mindful of drastic developments or fluctuations which require system updates. Having an accurate costs system can help you make effective business decisions about the future of your organization.
Categories: Cost Accounting