Costing for Manufacturing Decision Support

June 7, 2013
Costing for internal decision support requires a much different approach and perspective than the traditional costing done to support financial statements.

Though costing will not be bound by accounting standards such as accruals, matching revenue and financial periods, it will demand rigorous adherence to cause-and-effect logic.

I hope cost models for internal decision-making require an organization to define its goals and objectives, accurately represent resources and processes, and evaluate the information logically. The gamesmanship associated with accounting estimates, allocations and timing differences for financial reporting are gone. The goal is to represent the organization as it is on the production floor, link operations and financial data, and critically evaluate the impact of decisions and improvements.

The first step is to define your organization’s strategic objectives and the frequent and significant decisions made internally to create value from the operations and resources. Because you are focusing on internal decisions, you have to look carefully at your organization.  The many small decisions about order acceptance, pricing/special pricing, outsourcing (maintenance and production), product mix, improvement projects, and many other routine decisions involving cost information need to be fully supported. Lots of singles have the same effect as home runs.

The second step is to create the conceptual design for your organization’s cost model. The question you seek to answer: How does my organization create value from its resources? This means you need to clearly understand your resources and the relationships between them. You want to identify the specific management objective/output that consumes the time/capacity of each resource (normally groups of similarly employed resources). You also want to know the unconsumed or idle time/capacity of resources and time spent on necessary tasks that don’t lead directly to value creation (maintenance, training, vacation, wait time, etc.).  The management objective/output of a resource or resource group will normally be an input for the next resources in the production process, not a final product.

>> Beyond the Factory Floor: Manufacturing managers should be aware of their superior position creating information for the organization on the cost of products and operations.

What needs to be understood is the nature of the resource relationships to changes in output. Is more of a resource consumed when the level of output increases, is the resource used less when output decreases, or is the relationship fixed for large ranges of output changes? An internal use cost model needs to be created first with resource quantity data, not cost data. Most financial accounting models focus on dollars at the beginning of the modeling process. Internal cost models must build the model based on resource quantities to ensure dollars reflect discrete resource cause-and-effect relationships. The conceptual design should also include examples of the operational and cost reports managers will use.

The third step is to identify, configure, test and implement the modeling tool. Many will argue this step is too late in the process; however, many costing tools lead you down particular design paths. To overcome design bias by the software or implementer and take full advantage of a tool’s capability, an organization needs to know what its cost model should look like, what its data sources and needs will be, and the decisions it needs to support. The conceptual design based primarily on operational resource quantities provides a solid guide for implementation, testing and evaluation. Operations managers should readily recognize their resources and processes and see them reflected in cost information.

Advanced costing methods, such as Resource Consumption Accounting, that focus on internal decision support and linking operational and financial data allow managers throughout the organization to clearly see the impact of their work on the organization’s strategic objectives and identify and justify improvement opportunities more efficiently.

>> Larry White, CMA, CPA, CGFM,  [email protected], is Executive Director of the Resource Consumption Accounting Institute (, which trains and advocates for improved cost information connected to operational business performance.

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