New Expectations for Cost Information for Manufacturing Decisions

Financial information needs to step up with new approaches to reflect operational models, collect information that supports operational decisions, and support the creation of value.

Larry White, Resource Consumption Accounting Institute
Larry White, Resource Consumption Accounting Institute

As a manufacturing manager, you have had innumerable discussions (often heated) about the inadequacy of a company’s cost information. You’ve been held to unreasonable standards, seen the impact of bizarre allocations, been subject to unrealistic performance requirements, and often monkeyed around with the costing model to create some sanity in an insane costing system.

The problem is that the only costing information most accountants create is focused on external financial reporting. Then they try to connect it to operations with variances and standards they learned in college. Though they won’t often admit it, most accountants know this information is not useful and often impairs decision-making. The Institute of Management Accountants found in a survey that 98 percent of financial executives believe the cost information they supplied management to support decisions was inaccurate.

Manufacturers and business leaders should expect better from the cost information used internally for analysis and decisions. For this information, there is no governmental regulatory agency enforcing rules, so chief financial officers can use any system, analytic technique or practice they find that will support the organization’s decisions effectively.

Unfortunately, relatively few make the effort, but this might be changing. The same digital age innovations driving Industry 4.0 with robotic process information, block chain, advanced analytics and artificial intelligence are causing the traditional finance functions like routine accounting operations, financial reporting, tax and treasury to be automated as well. Finance needs to begin listening to the needs of customers for increased financial insights for decision support and value creation analysis. Manufacturing can help guide finance as it seeks to become more of a business partner.

What should you expect from the costing information that supports your decisions? The Center for Managerial Costing Quality has come up with the following Bill of Rights for users of costing information.

 

Bill of Rights for Managerial Cost Information Users

Definition: Managerial costing supports decision-makers tasked with optimally achieving their organization’s strategic objectives. Decision-makers, at all levels of an organization, should be provided managerial cost information that:

  1. Clearly reflects the causal operational relationships of resources, their capacity and the processes that produce the organization’s outputs.
  2. Calculates and reports reliable and actionable information on costs of processes, products, service lines, channels, missions and customers.
  3. Reflects the economic realities of the decision at hand, unhindered by external regulatory accounting rules.
  4. Is consistent with the organization’s creation of long-term sustainable value or the long-term execution of the organization’s mission.
  5. Doesn’t lead to argument and debate about its usefulness and accuracy.
  6. Is readily available, sufficiently detailed and logically structured to improve visibility, facilitate analysis and provide insights.

Resolution: Decision-making is challenging in all circumstances. Decision-makers, at all levels of an organization, must demand that those providing cost information for their decision-making honor these rights that are essential to effectively execute their management responsibilities.

Does the information you currently receive meet this standard? If not, demand your rights! It is essential to enhance the success of your company. There is no excuse for failing to create effective managerial cost information for internal decision-making. The knowledge and techniques to do advanced managerial costing have been available for decades, and today’s technology allows multiple financial models of the organization and interconnectivity with operational systems. Manufacturing systems operate in real time. Financial information needs to step up with new approaches to reflect operational models, collect information that supports operational decisions, and support the creation of value every day and at all levels of the organization.

 

>>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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