I recently met with a potential client and his cost accountant to talk about their concerns related to their costing system. This was small, but successful company that had been around for many years. As we talked through the cost process, it quickly became apparent that the company had implemented a fairly sophisticated costing system. Although it was a non-traditional method, they were monitoring the results frequently and it was still effective at providing the management team with the kind of information they needed to manage the operations. The cost accountant had been with the firm for many years and was very helpful in providing information about their cost process. Despite my initial concerns, I determined that the company’s systems and processes were actually quite good.
Then again, towards the end of the meeting he asked me, “how do we really know that what we’re doing is correct and accurate apportioning cost? And what is the acid test to be sure we are doing this right? It was then that I realized that in spite of all the time and effort they were devoting to their cost system every month, they had never taken the time to reconcile their cost back to the actual results to determine the system’s accurate. I was stunned! In prior conversations with this potential client and their cost accountant, I was impressed with their cost accounting knowledge and the systems they had put in place no matter how home spun it may have been. The thought that they were not attempting to reconcile any of the cost information back to the general ledger never even occurred to me. It seemed so logical that one of the key performance indicators of your cost system is readily reconcilable back to your general ledger and the discrepancies are identified and monitored as part of the overall monthly process. The fact that this company completed most of the other parts of the cost accounting process without ever even thinking to do this was a revelation to me. I then spent the rest of our meeting talking about how I would reconcile this, what the benefits would be, and how frequently and in what format I would do these reconciliations. The president and the cost accountant took notes on all of our and I am confident they began immediately working on how to best reconcile this information back to their general ledger.
In conclusion, no matter how sophisticated a company may seem implementation and management of its cost system, sometimes an outside expert with the global view of how a system should go together and be monitored can be invaluable as part of the tune-up. Thi s wau you can ensure you are getting a maximum performance. Having 2/3 or even 9/10 of a great system is certainly a good start, but it’s not nearly as good as having 100% of that system functional so that as a management team you are getting the maximum value you can from your cost system.