The Evolution of Cost Accounting: What Happened?

Jun 18, 2014

Recently I was having lunch with an old friend with whom I began my professional career. In fact, it was one of my very first jobs in cost accounting and this gentleman was the cost supervisor at the company where I worked. We only worked together for a few years and in the many years that have past, we have not worked together at all. He remained at the company and went on to be the CFO. Part of our discussion at lunch was about the evolution of cost accounting in American businesses. My perspective of what had occurred was from the outside, as a Certified Public Accountant and consultant in the cost area and what I had seen transpire over the years in a broad range of industries. His perspective was from the inside which was exclusively as a businessman managing the business and organizing his accounting needs as was appropriate.

We talked for a while about the accounting department in a manufacturing company in the past. He spoke specifically about our mutual experiences while we worked together. That accounting department consisted of a number of sub-departments. Of course, one was the general ledger side, then there was a payroll side, there was a property and plant side and a cost accounting side. In addition, there was an inventory control side and, in our case, a cost estimating sub-department. Each of those sub-departments were staffed with several people who were primarily focused on the duties specific to that department. Of course, many of the operations back then were manual and reports were manually prepared as were calculations supporting those reports. Each of the sub-departments had a departmental supervisor who was quite knowledgeable in their specific area. We both agreed that was the heyday of cost accountants. There were annual cost revisions, there was constant updates of standards and rates, as well as a full range of variance reports being published daily, weekly or monthly with management’s actions were in part directed by cost information.

But today’s accounting department is significantly different. Many things have been automated to the extent that the extensive staffing required to complete them in the past is no longer necessary. In my conversation recently, the CFO explained that their accounting department now basically has the responsibility of the general ledger with some responsibilities for all of the other possible categories under their job description. As a result, much work has to be delegated to automation and many items have to be abandoned, primarily because there weren’t the resources needed to staff them. Budget cuts, cost containment and lean manufacturing, in effect, forced continued restrictions on the number of staff.

We mutually agreed that the loss, particularly in the cost area, is significant. It has been his experience that not many of todays general ledger accountants really have a full grasp of how cost accounting works, which is also my experience. Due to this cost information, which is relevant to continuing profitable operations, is harder and harder to come by. He was able to recite several recent examples where the cost information being computed was materially in error and misleading, thereby complicating management’s ability to change direction if needed because of inadequate costing information.

I intend to gathering all the information I can about the changing world of cost accounting and will certainly write future blogs on that very subject.

Categories: Cost Accounting