Does Your Costing System Have Purpose?

Mar 20, 2015

I recently read an article where the author discussed how contemporary American businesses focus their energy on the type of cost system being utilized rather than the purpose of the costing system.

He highlighted the degree of attention being focused on the different methods of costing and different systems, that the entire business marketplace seems to be caught up in choosing the right cost system. The ultimate goal is to select the most accurate system with the best reporting and insight. All of these features are presumed to be based solely on the type of system that you’re implementing.

PurposeHowever, the author argued the underlying uses of various costing information is far more important and should be the real focus of the management team when deciding how best to compute their cost.

There are numerous uses for costing information in American business today and, unfortunately, there is not a single cost that could be used for all purposes. This is true simply because the requirements for each purpose force cost managers to include some components of cost in one type of analysis, and exclude those same components in a different type of analysis. It is simply not possible to have one cost for all purposes.

We have had cost forum attendees report they are maintaining two completely independent cost systems to get satisfactory answers to the full range of cost problems that they were facing. I’m not advocating that businesses set up and maintain more than one cost system. However, I do think in this case the business recognized it is more important to pay attention to the purposes of costing information rather than focus on one system with the hope that it can answer every problem.

I believe it is possible and desirable for one system to produce a variety of costing information to meet all the needs of a business. However, the system has to be designed from the ground up to include the various choices that are necessary to meet all of today’s business costing needs.

I believe many of the ERP systems available today have these capabilities, but cost managers do not fully utilize the capabilities of their systems. Therefore, the resut is maintaining Excel spreadsheets to do certain specialized costing functions when the systems themselves should be relied upon for that information.

Categories: Cost Accounting