The Costing Value Proposition

Jun 12, 2015

I was recently with a group of other accounting professionals at a conference for LEA http://www.leadingedgealliance.com/. During a meeting specifically for accountants involved in manufacturing, we discussed many of the issues facing American manufacturers today. The conversation was far ranging and covered many topics, some of which were the first I heard that topic specifically related to manufacturing.

During this meeting, I of course also talked about my recent issues, many of which were related to cost accounting. Quite interestingly, at the end of my conversation one of the other accountants in the group said “what’s the value proposition surrounding costing issues?” Quite frankly I had not thought of costing in those terms and I am sure my answer was incomplete as I was unprepared for that specific question.

After the meeting, I decided to focus on the value proposition in our prior costing assignments and decided the first thing to do was to settle on a definition of a value proposition. To me the most appropriate definition is, a value proposition is a promise of value to be delivered and acknowledged and a belief from the customer that value will be delivered and experienced. A value proposition can apply to an entire organization, or parts thereof, or customer accounts, or products or services.

However, as I thought more about cost accounting and the value proposition itself, it occurred to me, like most things in accounting… it depends! In my recent experience in working with costing assignments, generally the value proposition is variable depending on the nature of the issues related to costing that we are being called in to solve.

After thinking about this in greater detail, it occurred to me that there are three basic components to the costing value proposition. Each component is significantly different but all begin with incomplete, inaccurate or a nonexistent costing system.

The first situation that we run into as we consider the value proposition has to do with the company that has recently experienced some pain associated with their costing process. The pain could be restatement of profits due to inventory adjustments, it could be lost opportunities, it could be lack of knowing profitability by job or any other of a long list of pain points that could be affiliated with the costing process. From that pain point comes the need to correct the costing problems that led to the pain. In this case, the value proposition is that proper costing would eliminate the kinds of pain that a business has recently experienced because of its defective costing process.

The second component of the value proposition associated with costing has to do with the CPAs relationship with their manufacturing client and the CPAs knowledge that the client’s costing system is inadequate. In this case, no pain has been yet discovered, but the professional advisor knows that the system is incomplete or inaccurate and suggests, sometimes repeatedly, to the owner that the system be repaired. Finally more as a result of their long trusting relationship and less because the owner is aware of a huge impending problem, the owner will direct the CPA to do what is necessary to fix the problem and monitor it in the future so that no further issues will be experienced. In this case, the knowledgeable CPA advisor is using his expertise to protect his client from an unexpected and potentially expensive surprise some time in the future. No different than he does on any of the other topics when he provides advise to his client. The value is an experienced CPA advisor has helped prevent an unexpected, negative surprise to his client.

The third situation that we see occasionally associated with costing assignments, has to do with an unusual circumstance related to costing problems that requires attention to the cost system, not because there has been a recent problem, and not because the outside advisers are recommending such a change, but rather because an unusual circumstance has occurred that requires that the cost system be reviewed or revised. That could include the implementation of a new ERP system which is a great opportunity to rethink how costing is being done, or it could be a dispute between one or more management members about the accuracy and the construction of the cost system. This often requires outside assistance to resolve the dispute and bring an accurate cost system that all parties will trust and use. The value delivered here is the greater utilization of a new ERP system and the improvement in reporting management information that comes with it, or the positive resolution of the differences in managements opinions.

The concept of value proposition, is a great way to think about how proper costing can add value to many organizations today, not just manufacturing.

Categories: Cost Accounting