Same As Last Year (SALY) Creeping Up Again?

May 13, 2014

I was talking to a CEO the other day who was talking about his machined controlled environment that uses labor to apply overhead. I imagine if I only gave you one guess you could probably guess as to why. I’m sure you guessed it…. Because that was how it was always done! They had converted to a machine controlled lean environment, but left the standards the way they were. They were grossly undervaluing inventory, so a suggestion that was given to them by another accountant was to just multiply the standard by 5. This came from the fact that each machine used to have around 5 people to do the task when it was machined controlled, so now since it is at most 1 person, let’s just multiply by 5! Thankfully the CEO knew that although the rates were wrong, that too was wrong! Which is when the phone call came in.

How often do you hear this from your controller, or the CEO, or maybe worse yet, how often do you say it? Many standards were set based on labor, since at one time many operations were labor intensive. However, many operations are now more machined controlled than labor. A person may need to load the machine or unload the machine, but the speed is not controlled by the person, but the machine. This would of course be a machine controlled environment, which means the rates should be based on machine hour, not labor!

Stop letting SALY creep in, like a bad horror movie! I recently visited my parents for a weekend and another relative was staying there as well. We were starting to get ready for summer so we removed the winter cover from the swimming pool. We had to clean the cover so we placed it on the cement section of the driveway, which meant I had to move my car to the gravel section further from the house. I forgot to move my car back that evening, so when my other relative returned home she thought she had to park back there too, leaving her even further from the house. I learned when she came running in-she had just finished watching a scary movie with her friend and was so scared coming from that far away in the dark! I laughed and felt bad at the same time. But this is what I picture in my head thinking about SALY creeping in-run!

Do not continue to use the excuse that we’ve always done it this way, we’re making money it’s fine. This particular CEO had a large adjustment to inventory at the end of the year, and because of this lost credibility with the bank. Now he wants help determining the actual rates and reestablishing credibility with the bank.

Do not wait until you have a problem, it’s a lot easier to be preemptive than to try to fix a problem.

Categories: Cost Accounting