Can Big Data Improve Manufacturing Cost Information?

The techniques and technology could help to connect cost and operational manufacturing to improve decisions, but organizations need to make sure they have the right design before collecting the data.

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Big Data is often touted as a solution to shortfalls in organizational information. In an online glossary, Gartner defines Big Data as “high-volume, high-velocity and/or high-variety information assets that demand cost-effective, innovative forms of information processing that enable enhanced insight, decision making, and process automation.”

As data collection, storage and processing become cheaper, it is often assumed that the correct information will be readily available. But for cost data, this assumption is incorrect. The existing paradigm for cost information focuses on generally accepted accounting principles and financial reporting. Collecting, analyzing and using cost data to effectively support manufacturing operations requires a different paradigm—one focused on internal management decision-making, not external financial reporting.

Big Data techniques and technology can connect cost and operational manufacturing information to improve internal decisions. Big Data is not a solution without addressing three key points: First, the organization must understand what information is needed for internal decisions; second, the data must be analyzed correctly; and third, appropriate cost and operational data must be collected. In short, a design is needed before data is collected.

To understand the cost information needed for internal decisions, organizations can evaluate the problems they have using the cost information created for external financial reporting. Why aren’t manufacturing managers using it? What decisions require special cost analyses? Where do operational and cost information produce different expectations and results? A more direct approach is to use the Institute of Management Accountants’ (IMA) Conceptual Framework for Managerial Costing and evaluate your organization’s goals and objectives using the framework’s principles, concepts and constraints. The key to effective cost information for decision support is that cost information clearly reflects causal resource relationships in the organization.

Correct analysis requires an understanding of the costing approaches that can support the Conceptual Framework for Managerial Costing. Approaches such as resource consumption accounting, German management accounting’s GPK, and capacity-sensitive, pull-oriented activity-based costing solutions are the approaches necessary to support cost analyses that will connect and guide operational improvements.

Collecting the correct data is the critical element. The data essential for internal decisions simply isn’t needed for external financial reporting; therefore, many enterprise and financial system implementations don’t improve cost information. Management-focused cost information must begin with an operational model of the enterprise that shows how resource capacities are consumed to create value. Cost information must be structured to fit the consumption and flow of resources in the organization showing cause-and-effect relationships.

Excess capacity is a common example of the type of strategic information that is missed by traditional cost systems oriented around financial statements. Managers should be rewarded for creating excess capacity by improving the efficiency of their operations—doing more with the same resources. Operational data often shows excess capacity, but traditional financial costing systems simply push excess capacity costs to products with generalized allocations; product cost tends to go up when production goes down and vice versa. Decision-oriented cost information must be designed to clearly reflect operational information and support internal managers. Data that doesn’t exist can’t be collected.

Internal decision-oriented cost information is not a common output of today’s financial, enterprise resource planning (ERP) and Big Data solutions. Furthermore, very few vendors or implementers have the expertise to design an effective data collection and analysis approach.

Seek out detailed knowledge of resource consumption accounting, German management accounting, and IMA’s Conceptual Framework for managerial costing to design a cost system that supports your operational information and internal decision support needs. Manufacturing managers don’t need yet more data! They need properly structured information for the many decisions they make.

>>Larry White, CMA, CFM, CPA, CGFM, lwhite@rcainstitute.org, is executive director of the Resource Consumption Accounting Institute, which trains and advocates for improved cost information connecting operations to business performance.

 

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