Perform and Review Cost Trends Analysis – Discover Potential Costing Problems

The typical cost accounting report shows the current cost of each product, perhaps in relation to a standard cost that was put in place when the product was first created. Though this report does give management a snapshot of how existing costs relate to standards, there is no way to see if the cost was gradually increased or decreased from the preset standard cost, if the actual cost was ever close to the standard cost, or if there have been sudden changes in costs which are probably related either to step-costs in the overhead category (such as adding a new facility) or to material cost changes. Given the lack of information, management has no way of knowing if the current costing situation reflects deterioration in costs or an improvement.

The solution is to switch to reporting based on cost trends. An example is shown below:

Cost Trend Analysis Example 

As noted above, the report starts with a base cost established with actual cost data when the product was first released to production. Then the series of columns in the middle of the report show the historical total cost of each product, based on any time period that is most appropriate (quarterly costs are shown in the report). Then the projected target cost that the company is striving for is noted to the far right of the report, with a final column noting the percentage difference in cost between the most recent cost and the target cost, along with the date by which the company is expecting to achieve the target cost.

This format allows management to easily determine where costing problems are developing, or if there are potential problems with reaching a targeted cost by the due date. This approach gives management a much more potent tool to use in tracking product costs.

Supplemental information can enhance the information shown on the cost trend chart.
For instant:

  1. It can include a column showing either unit or dollar volume for each item, allowing management to quickly determine where it should invest the bulk of its time in fixing problems—on those products that have a large dollar impact on total revenues, as opposed to those that may have large cost variances but that have only a negligible profitability impact.
  2. It may also be useful to include the price and margin in the table, though this can be difficult to determine if pricing varies significantly by customer, perhaps due to variations in the volumes sold to each one.

 

Another reporting possibility is to issue a subsidiary-level report that breaks down product costs into multiple components, so management can determine which costs are deviating from expected values. If this option is used, there should be matching target costs for each component, so management can compare actual to expected costs in all categories and see where there are problems. Finally, if there are many variations on a standard product design, the report may become too lengthy and unwieldy to be easily readable.

For instant:

This can happen when the same product is issued in 10 different colors, resulting in a report with 10 line items—one for each product variation. In this instance, it is useful to cluster each product group into a single line item resulting in a much shorter and more readable report.

All or some of these reporting variations can give management a better idea of the cost trends to which their products are subject.