The Importance Of An Updated Cost System

Jun 29, 2015

We have been working on an assignment with a manufacturing client to revise their entire costing system. In this particular case, there are numerous problems with the system both in original design and construction. In addition, subsequent problems have developed with regard to reporting and maintaining the system month-to-month. The original costing system was designed utilizing estimates to provide a basis for the start-up of operations. This is not the problem. In fact, we have recommended repeatedly in the past that system start-ups require estimates which can be modified at a later date.

In this case, the cost manager was well aware that set-up times and job changes were originally estimated based on the production managers knowledge at the time and were never changed as operations continued. By the time we arrived, the original production manager was gone and a new production manager was in place. The new production manager knew that the standards were grossly in error but was unsure as to how to correct the problem. The cost manager was knowledgeable about the issues but was fighting so many fires simultaneously related to this cost system, that she was unable to effectively deal with these estimated standards for job changes and set-up times.

This company frequently changed over operations from one product type to the other and the job change calculations were material to the overall cost of the product. Originally, the system was never set-up to monitor and report on different standards compared to actuals on a job change. However, it became painfully obvious to the entire management team that material differences between estimated job changes and actual job changes were present. The product being manufactured was a large bulky product so the ability to simply increase run lengths and attempt to manage the excess set up time was not viable. This was true, especially because it would have taken such a large amount of warehouse space which was not available to store all the excess product.

Issues with inaccurate standards seem to be common place in the costing business and generally not a problem if the company has a way to monitor and then identify those standards. Those which are in error must be constantly reviewed, upgraded and changed as necessary to meet current conditions. A fully functioning and accurate cost system is frequently in need of attention as work processes change and standards become more refined with longer and longer history. The goal should be to always accurately cost the product so changes in operations or work processes, including the speed of the process, is currently reflected in the cost system. This particular system made no allowance to monitor job change or set-up times and, therefore, the facts necessary to make the changes were not readily available.

With relevant information presented in an accurate format, the changes necessary to keep a cost system functioning will be readily available. Frequent review by those the managers responsible for maintaining and upgrading the cost system will ensure a solid system, one that can be used to make better business decisions.

Categories: Cost Accounting