Is Your Poor Costing Causing Stress?

Oct 28, 2013

shutterstock_94267417Distraught, sick, upset, stressed. Did you know these are also side effects of poor, or inadequate product costing?

In all the years I have been working on product costing issues, I have never viewed the problem from the vantage point I was offered last week.

Picture the situation I was involved in:  a meeting with top management, including those in operations (plant manager, scheduler, purchasing, and an estimator). In this meeting we were trying to determine the best method to begin to develop a costing model. The look of exasperation on everyone’s face was real. It became apparent that this situation was more than just stressful, in fact, it was part of the daily environment this management team was living.

As the owner of the business left the room, one individual turned to me and said: “something MUST change. I have no idea what products we are making money on and what products we are not making money on.” Couple this with the fact that he had both hands aside of his head and shaking it side-to-side with a defeated look on his face. Here is an employee, desperately wanting to do his job.  He wants to be effective and make a positive contribution to the company. He knows that is NOT right and that he is NOT being provided with the tools. On a daily basis, he cannot make decisions about proposals, outsourcing, new business, rush jobs, all because he does not have the information he needs to do so. Despite repeated attempts to explain the situation to management, it is falling on deaf ears. The Company is currently at a very pivotal point. They are facing customer demands and negotiations, and the decisions they make right now can MAKE or BREAK the future of the Company. Stress is a huge understatement in my opinion; it is like coming in to do my job every day without technology, no computer, iPhone, software or printers.

This company has NO IDEA how much money they are making or losing on any single product they sell. How is that possible? They are basing operational standards (cycle times, labor efficiencies) on data that was developed more than twenty years ago. Combine that with the fact that they have not spent any time trying to link their costs with the products that are being made and it is a virtual recipe for disaster. That seems obvious, but the effect it is having on the management team, the decision makers, is something I never truly considered until last week.

These employees will have difficulty continuing to come in and perform their job each day unless something changes. You cannot make decisions without information, and then get reprimanded for making bad decisions. The whole process is one designed for failure. How can you make “the boss” see that the investment of time and resources into developing an effective cost model and possibly software to assist the process is worth it? It may take “I told you so” after the big contract disappears, or the realization that we are hitting only 5% of those jobs we quote, painting a mathematical picture, or, it may be simply looking at the reality of the situation head-on- using blunt words.

When employees are suffering, it is time to invest some effort into identifying product costing, and developing a model that is transparent and accurate, flexible, and accurately reflects your process. Look at your employee’s faces, are they trying to tell you something?

Categories: Cost Accounting