This is an interesting concept, to think about how healthy your cost system is? We think of cost systems being useful as providing information and as being reliable, but never in terms of whether they are health or not. If you’re not sure if your cost system is healthy, perhaps you should do a health checkup to see if it is functioning in the way it’s supposed to and to its maximum efficiency. Think of it as going through a physical for your own personal health. A doctor checks a variety of things and based on his evaluation, he comes to the conclusion of whether you are healthy or not. I think we all know of cases where those results are not absolute, but it is a good indication of where the problems lie. Most important, it unearths those problems so that they can be rectified before they become potentially fatal. This can apply to a cost system as well.
The first place to start is in the five steps of the cost accounting cycle. Does your cost system include each one of the five steps whether it’s done automatically as part of a comprehensive interactive accounting software package, or are you required to do each one of these steps manually with hand built spreadsheets. As long as the system has the integrity to meet each of those criteria, the system should have all of the elements of a complete job costing package.
- Develop the numbers
- Classify cost correctly
- Allocate costs correctly
- Report results timely and accurately
- Reconcile cost system results to actual results
If you’re not sure what is included in each of those five steps or what should be included it could be easily resolved with a phone call or email to either myself (horst@wvco.com), Jennifer (kinzel@wvco.com) or Tara (west@wvco.com).
However, the next step of this process is a little more specific. Often times when a patient goes for a physical, it is the direct result of reoccurring problems or ailments that are believed to be related to their physical health. Having a professional evaluate your symptoms and provide medical treatment is why you go to a physician. Ailing cost systems have similar kinds of symptoms and some of those symptoms are as follows:
- You are losing quotes to competitors more often than you think you should. The companion to that is your customers are constantly telling you that your prices are too high compared to the others in the market.
- You cannot identify gross or net profit by customer, by part, by product line, nor by manufacturing process. You don’t have the capabilities of drilling down to determine what parts are making money and which are not.
- Each of your departments in your operation has its own computed product cost calculated in its own excel spreadsheets for it’s own distinct purposes without any relationship between departments as to what they consider proper costs.
- Your company manufactures diverse products or multiple processes with no differential in those processes of how overhead is applied or how costs are accumulated.
- Your management team has no confidence in the costing methods and does not understand how costs are accumulated, overhead is apportioned or how reports are being created related to job costing.
- Your company is consistently profitable. You do not see any relevance in devoting time or money to developing or improving your current costing process. You know that it might be unhealthy, but it doesn’t seem cost effective at this time to spend time or money to fix it.
- One or more members of the management team believes there is one true cost than can be computed for all the products and be used for every purpose. The truth is that no matter how robust your cost system is, there are so many diverse uses for product cost one singularly computed cost cannot be used for all possible purposes.
If you have any of these symptoms perhaps a health checkup for your cost system is in order. They are likely not time consuming or expensive, but it may provide support and information for the future of the company that cannot be provided in any other fashion.
