Why is Costing Always Last?

May 22, 2014

lastI recently met with a potential client to discuss the current state of their costing system. There were numerous problems associated with the system and most of the management team had learned to stop relying on the system because of built-in inaccuracies that were widely known by the entire operating team. Many of the managers that have to rely on costing information had developed their own cost sheets that they were saving for each of their specific purposes simply because the company-sponsored system was in error.

As we talked through the recent history of the company, it became apparent that this company has gone through significant changes in the past. Changes of location, changes of manufacturing operation, changes in cost structure, in fact virtually every part of the financial and operational structure of the company was touched by some change in the last four or five years. Many of those changes were so significant that they by themselves would have invalidated the cost information that had been previously prepared.

As each manager talked through their interest in relevant costing information, and we went through what systems they were relying on now, I could see where at each time of significant change the modifications to the costing system were discussed but no effort was made to integrate the modifications into the costing system. I’m sure the senior management was aware of all the changes in line and wanted to wait until almost all of the changes were complete before embarking on any modification to the cost system. This makes sense, as they wanted to simply avoid having to do it multiple times. However, now in this case, the final changes had been completed several years ago so the cost system update is quite long overdue.

There were also ancillary problems being uncovered along the way which seemly were unrelated. However, as those problems were discussed individually, it became clear to me that at the foundation of all of these reporting or operational problems was the one issue that accurate costs for products produced could not be readily achieved and thereby created lots of other additional difficulties in the business.

Unfortunately, scenarios like this are not all that uncommon in today’s costing world. Business managers have evolved over the years to place less and less importance on an accurate costing system with correspondingly reduced controls in area’s that are important to the company. The reasons behind these changes are a mystery to me. It’s inaccurate to say that all managers have fallen victim to this mindset. We frequently run across very talented business managers who are conscientious about maintaining and updating their cost system as necessary. As small businesses in particular go through the evolutionary changes of growth automation and improved efficiencies, it is easy to concentrate on the technology-based solutions that are available in today’s marketplace and ignore the need for fundamental cost data that is accurate, relevant and timely.

Categories: Cost Accounting