Happy New Year!

Jan 02, 2014

For many of my calendar year corporations, this time of year represents an important point in the annual cost accounting cycle.

By now, most of my calendar year end corporations have prepared their budget for 2014, and it has been approved, or is in the final stages of approval. Effectively the entire operation has set their goals for 2014 and are preparing to implement the strategies it will take to meet those goals. In some cases these points in the cycle have already occurred and January opens with all of the department heads fully engaged in their 2014 goals. However, for the cost department, this is a time of great importance.

Very likely four of the five cost steps have already been performed. That is 1. they have developed the numbers 2. determined the cost classifications 3. allocated out the various overheads 4. reported the results to management throughout the year in a fashion that was useful and timely.

As the year end closes, the final general ledger numbers become available and, as many of you know, I consider the actual results of operations as depicted by the final general ledger and financial statements to be the ultimate goal to which all cost numbers should be reconciled.

That doesn’t mean that the cost system must be in 100% agreement with what’s being shown as expenses on the general ledger, in fact, some items on the general ledger are inappropriate to be recovered by the cost system and should be excluded all or in part.

What the cost folks should be doing is after analyzing the variances that were created for 2013, reconciling all of the components of the cost system back to actual results to look for anomalies, errors, or other adjustments that should be taken into consideration for the 2014 year. Only by complete reconciliation of those costs can a cost manager be sure that the cost systems are working properly, are adequately recovering costs, and apportioning overheads. This all needs to be done in a fashion that is logical and reliable and produces results that provide meaningful information. Any operation that does not perform this vital step is exposing itself to substantial risk that there are fundamental disconnects in the cost model from actual results thereby rendering cost information as less useful than it could be.

This reconciliation should be as automated as it can be and should be performed as soon after the close of the year where actual budget results are available and before the full startup and implementation of the 2014 cost model is complete.

I recognize this is a busy time of the year for accounting staffs at most calendar year corporations but there is little alternative related to the accuracy of the cost system for 2014 than doing these reconciliations prior to the full implementation of the 2014 cost system.

I know it’s a significant temptation to delay this to some future month away from all of the obligations of the year end close, but I believe any cost manager that chooses that alternative is running the risk of having to republish results from the cost system in early 2014 prior to when it was reconciled some time later on in 2014.

Categories: Cost Accounting