Nov 11, 2013

I recently had a meeting with a new potential costing client and I know you are tired of hearing it, but the issues are eerily similar to those I have worked with before. Out-of-date systems, a Controller who has no knowledge of costing and therefore a lack of understanding and a management team that trusts the numbers that are being generated both from the general ledger and the cost reports.

The question management posed was, “What can you do for us?” In my mind, I am thinking what couldn’t I do? They came prepared with all of the data that we had requested including the copies of many reports from their system that they don’t utilize! Bill and I decided to attack this with then end in mind.

Costing_FinalHopefully by now you are familiar with our costing model. The final step in the costing process is reconciliation. By short definition, that just means that in order to verify the accuracy of your cost model, you must reconcile it to the general ledger. That doesn’t mean that you have to include every cost, but instead being able to explain WHY the numbers are different. I can say with 100% certainty that every single costing job that I have been a part this element is always lacking and is the least understood.

Even for the most experienced cost accountants, sometimes they simply don’t understand why it is necessary, or even how to do it. As a matter of fact, I am dealing with that same issue on a current client now, and so far, have not been able to convey the importance of it!

Back to the potential client, I immediately got to work with all of the cost system reports and general ledger reports to determine if they were recovering the right amount of costs with their cost model. As you might imagine, they did not tip the boat. My record still stands at 100%. I discovered they were not only recovering enough costs, but more, and more, and more! I need to confirm the sources and assumptions I made when reviewing all of their data, but it appears pretty clear to me that there are some serious issues that need to be addressed in the costing system.

Why does it matter? They are trying to make strategic decisions for the future direction of the Company. Imagine that the cost system is showing that Part A costs $2.72 to make when in reality it only costs $2. How much business will you lose because of your price quotes? How many jobs will you turn away because you don’t think you can make money on them? That is where this Company is at. It is these decisions that make the difference between a “so-so” Company, and a well-oiled profitable Company. My intention is to take the IMPOSSIBLE and turn it into IS POSSIBLE. As this relationship progresses, I will make sure it IS POSSIBLE to accurately make those decisions they so desperately need to!

Categories: Cost Accounting