Rx Needed: Current Costing Practices Yield Little Accurate Info

Good data is a critical component of the costing equation, but more often than not, doing the math is harder than the organization may think. Why? Because barriers exist between the finance and supply chain functions. The key to moving forward is breaking down those walls.

APICS, a professional association for supply chain management, and Institute of Management Accountants (IMA), an association of accountants and financial professionals in business, tackled the job of outlining best practices to get organizations on track. The result, a newly published report titled Working Together to Enhance Supply Chain Management with Better Costing Practices, offers some advice around how organizations can get better costing practices in place.

 “Supply chain professionals rely on cost information when making decisions but have indicated a need for that information to be more accurate and effective,” said APICS CEO Abe Eshkenazi. “This report highlights the necessity for supply chain and finance departments to work more closely and adopt costing practices that are progressive and focused on informing internal decisions.” 

Cost information is valuable across an organization, from procurement and supply chain to operations and sales. “From the supply chain perspective, an effective managerial costing system has clear value. It enables better make-or-buy decisions, defines landed versus delivery costs and determines the realistic cost of holding inventory,” said IMA vice president of research and policy, Raef Lawson.

At the same time, a variety of factors make costing exercises difficult. The report uncovered three root causes that get in the way of supply chain professionals getting reliable costing information:

  • An overreliance on external financial reporting systems:   The accounting system used by most organization focus on capturing and providing financial data aimed at external parties, rather than decision makers within the company.  Lack of adequate technology and software was cited by 39% of those surveyed. Four out of five organizations are unhappy with the costing information that their systems report, and a similar number say that they don’t have an intention to change those systems, according to Lawson. 
  • Using outdated costing models: Many accountants use traditional cost accounting practices to create costing information. Unfortunately, this type of planning, budgeting, and forecasting data doesn’t meet the needs of supply chain pros trying to do costing. Forty four percent of supply chain managers surveyed pointed to lack of operational data as a key contributor to their inability to use current costing information. At the same time, these same supply chain leaders may be unaware that it is even possible to create costing systems to better meet their needs.
  • Accounting and finance’s resistance to change :  Almost one third of supply chain professionals report that accountants are reluctant to champion newer and more useful accounting practices within their own organizations. The accounting function has increasing number of responsibilities, which makes them reluctant to devote time to developing inward facing resources, Lawson said. “We believe that accountants need to become strategic advisers to the leadership team,” he added. “Part of that means providing costing information that aids in making good business decisions.

Although challenging, these barriers to effective costing can be addressed. First, supply chain managers should strengthen their relationship to the accounting and finance functions within the organization with an eye to improving the flow of information. “Traditional accounting stops at the profit line without looking down the line at things like distribution costs, selling costs, etc.,” Lawson told EBN.

It is also critical for organizational leaders to put the creation of improved and updated costing models and IT infrastructure for accounting at the top of the to-do list. “These costing systems aren’t providing detailed information to optimize profitability by distribution and product channels,” Lawson said. “Costs are traced but often not in a way that reflects causality.”

Today, the technology, methodologies, and modeling for accurate costing exist. “The excuse for not implementing adequate costing systems is not as valid as it may have been in the past,” Lawson said.  

— Hailey Lynne McKeefry, Editor in Chief, EBN Circle me on Google+ Follow me on Twitter Visit my LinkedIn page Friend me on Facebook

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