July 2009
Not all sales are alike and not all sales are good (Read Is The Customer Really King). Consider the case where you win in a very competitive sales situation but you have to lower your price so much that you end up losing money on the deal. How about a situation where you sell a product for $100 and it costs $85 to make, store, sell and ship, but over the first year warranty period, it costs an average of $22 to support and service it? Or how about the case where you sell very large quantities of a thin-margined product and small quantities of a specialty product where (you think) you make a lot more per unit. But it’s possible that your accounting process does not recognize the true costs of each type of product. I have encountered many cases where one type of product is burdened with an ‘unfair’ share of overhead, distorting the true costs of both. In those instances, it often turns out that the high margin product really isn’t and/or the volume product isn’t profitable at all.
Generally Accepted Accounting Principles (GAAP) notwithstanding, cost accounting can be as much of an art as it is a science. There is considerable judgment in how costs are assigned and how overheads are allocated.
A client company, about to embark on a project to make some changes in cost collection and accounting, recently asked me how to ‘sell’ participation in this project to the company at large – afraid that it would be viewed as just an accounting project and not of any importance to anyone else. The answer is in the first paragraph above. In order to make good management decisions and improve the company’s chances to survive the recession and thrive in the future, you have to really know your costs and margins. The source of the data behind those decisions is in the plant and in the warehouse. Timely and accurate reporting is key to accurate cost accounting and good management decisions. And that’s to everyone’s benefit.
There’s an old joke I remember from my childhood: what’s worse than finding a worm in an apple? The answer: finding half a worm. Those worms are out there – I have yet to see a company go through a cost accounting exercise and not discover some (usually unpleasant) surprises. But they all agree that it’s better to know – as soon as possible. Regardless of what software you use, there are decisions in how costs are collected and how accounting is set-up that can make a big difference in the accuracy of the information you use to make those critical decisions. Contact us to discuss how we can help you improve your cost accounting processes.
