Though many of the problems-solutions advocated in the cost accounting world involve doing away with or replacing the existing set of cost accounting reports, there are instances in which they can be modified sufficiently to still be of great use. This post deals with a number of small changes that can greatly enhance the cost accounting reports. Though it would be best to install all of these upgrades, even using just one or two of them would bring about an incremental improvement in costing information.
The changes are as follows:
Assemble products into reporting groups – Too often, a cost report presents a list of hundreds of products, sorted by product number. Though there may be plenty of valid information in such a report, there is no easy way for a busy executive to determine where it is. Instead, it should be grouped into relevant categories, such as clustering all product variations into a single summary number or clustering product sales by customer. These clusters should always contain subtotals so managers can take in the total cost impact of each group at a glance.
Give rapid feedback. There is no point in compiling a perfect cost analysis if it is done months after a product is produced. Instead, a good cost report should be issued as soon as possible after a product is completed, allowing management to make changes to improve costs the next time the product is made. The best case of all is when a cost report is issued to management while a product is still being made (and preferably near the beginning of a production run) so immediate alterations will result in a rapid cost reduction.
Only report on exceptions – Some companies have such enormously long cost reports that there is no way to glance through them and spot the problem situations. To resolve this issue, reports should be issued that only show exceptions. For example, a report may only show those products with negative cost variances of at least 10 percent. By doing so, a voluminous report can be reduced to a short memo revealing those items requiring immediate attention.
Report on costs by customer – All too many cost reports only focus on product costs, not the total costs of dealing with each customer. By widening the focus of a traditional cost report to include this extra information, one can reveal some startling information, especially if a customer that was previously thought to be highly profitable is eating up an outsized proportion of a company’s resources in such areas as purchasing, warehousing, and order entry.
Use direct costing – Many costing reports only show product margins after overhead is included in the total costing mix. However, if the overhead allocation is not valid, management has no way of knowing what margins really are and usually ends up ignoring the cost reports entirely. An easy way to avoid this problem is to insert an extra pair of columns in the cost report, in which are inserted the dollar margin after direct costs (i.e., price minus labor and materials) and the direct cost margin percentage. Though this variation leaves no room for any overhead cost at all, it does result in a good analysis of direct costs.
These problems-solutions focus on assembling information into a cost accounting report format that is easy to read, relevant, does not require the reader to wade through vast amounts of data, and presents information as rapidly as possible. By installing them, one can make the existing cost reports much more relevant to the decisions that management must make every day.