When It May Be Appropriate To Suppress Costing Information

Oct 19, 2015

Have you ever been in a situation where key information is being withheld on purpose? Unfortunately, this scenario is not uncommon in the cost accounting world. I have heard similar scenarios where manufacturing departments suppress critical data from another department. Such actions can gravely impact an organization and ultimately lead to its demise. Knowing when to hold back costing information and how to handle such situations is essential.

What could be the motive for such reservations? A common cause is to keep prices confidential, specifically from sales representatives. Often times sales representatives may do whatever it takes to close a sale. This is not necessarily a bad thing, but closing a deal at or below cost does not help profitability. Keeping the costs of your products quiet may be a means to maintain profitability.

Another reason company costs may be kept from the sales department has to do with various lines doing essentially the same thing, but with varying costs. Line A, for example, may be newer, or have a more automated process than Line B. As a result, the cost between the two lines may different, but production is identical. If Line B is cheaper than line A, then naturally the sales department will want their product run on the cheaper line which results in a bottleneck scenario, leaving Line A empty. Sometimes companies will average the cost of the two lines in order to avoid this issue. Other times, a company will maintain the separate costs, but keep this information from their sales team. If they do not know a difference exists, both lines will remain in use. There is no right or wrong answer when dealing with the above scenarios. It is, however, critical for the situation to be handled. Ignoring identical processes which cost different amounts is only asking for additional issues down the road. It is important to consider different scenarios and what makes the most sense for your particular operation. I am not advocating costing a line incorrectly, but to keep in mind the need for accuracy and reasonableness in any process.

The next time the sales department inquires about the cost of running a specific line, think twice before answering. How many of you have faced such issues? How have you handled the situation?

Categories: Cost Accounting