The Cost Accountant Position (#140)
/In this podcast episode, we talk about how to reorient the cost accountant position to make it more effective. Key points made are noted below.
Problems with the Position
I’m bringing up this job position because there’re several interpretations of what a cost accountant is supposed to do. And if you set up the job in a certain way, it’s not very cost-effective. The basic problem is the title itself. A controller decides that he needs a cost accountant, because he wants to know what things cost. This seems reasonable, since you supposedly make decisions based on what things cost, and doing so saves the company money.
The reality is a little different. For example, what if a company has a standard set of products, and management wants to know the total actual gross margin on each product, every month. So the cost accountant spends hours and hours compiling the cost of materials and labor and allocates overhead really well – and what do you get?
Well, even if we sidestep the issue of which costs really should be included in this type of analysis, what we’re going to find is that the margins hardly ever change. Costs are built into products in the design stage. Once they’re designed, there isn’t much variation from month to month. So, management figures this out after a few months, and stops looking at the reports – and those are the reports that no one told the cost accountant to stop producing. This might sound familiar to you.
I reviewed a company that had this exact situation, and had them lay off the entire cost accounting staff, because the information they were producing had no actionable value. And that’s the key point. You can have a cost accountant churn out all kinds of costing reports. But if you don’t do anything with the information, why have the cost accountant?
Complying with the Accounting Standards
Instead of focusing on cost reporting, you can break down the job into two pieces. The first part is required costing work that you need in order to issue financial statements. This means valuing ending inventory, which, in turn, means reviewing inventory accuracy, and overseeing the month-end cutoff, and allocating overhead, and so on. Now, this is all required, but it’s not value added. You’re just complying with the accounting standards.
And that means there’s a tradeoff here. Inventory valuation needs to be right, but it doesn’t mean that you encourage the cost accounting staff to investigate immaterial items. This is essentially a cost benefit balancing act, where you have cost accountants spend just enough time overseeing inventory valuation to ensure that the result is pretty good. Not perfect, but good enough for the auditors.
Value-Added Cost Accounting
With any luck, that means there should still be enough time available for some value-added work. I’ve already talked about how compiling product gross margins is not really value added, since no one uses the information. Instead, we have to reorient the cost accounting work into areas that actually make a difference. And there are a couple of them.
First up is target costing. You might remember this from Episode 57. Target costing is about designing products to meet a certain price point and profit, which means that you have to pay close attention to the designed cost. This is perfect for a cost accountant, because you’re helping to ensure that products are going to be profitable.
Second is constraint analysis. I covered constraint analysis in Episodes 43 through 47. It involves focusing on whatever the company bottleneck is that keeps a company from generating more profit. The traditional location for the bottleneck is the production department, though I usually see it in the sales department. Anyways, the cost accountant should continually review the performance of the bottleneck, and keep suggesting ways to improve performance right there, or to route work around it.
Any improvement in a constraint has an immediate impact on profits, so there’s a clear cost-benefit involved in having the cost accounting staff work in this area.
And my third recommended task is what I’m calling the investigation of unusual stuff. You can quote me on that. It means looking into any expense item that’s out of the ordinary. I’m not referring to variance analysis, which is tracking volume and efficiency variances from standard amounts. There’re so many ways to fudge the baselines used for variance analysis that I find that whole system of analysis to be essentially useless.
Instead, cost accountants should look for any expense that jumps above the historical trend line, and investigate it. This is pretty easy. You just run a report that lists each expense monthly basis for the past year, and investigate anything that bumps above the average. And this isn’t just finding out what the amount is and reporting it to management.
A really effective cost accountant drills down to find out why the expense occurred, and if it can be avoided, and makes a complete recommendation to management. You can even take this a step further and have the cost accountant be responsible for making whatever change is needed, which really converts the position into sort of an internal consultant or troubleshooter. The reason for this extra level of investigation and pushing for changes is that department managers frequently ignore variance reports.
So instead, the cost accounting staff presents them with the problem and the solution, and even offers to fix it. And that provides value.
Summary of the Position
So let’s summarize what a cost accountant should really be doing. If a company has ending inventory, then there’s always going to be a block of time required to value it – but just enough time to avoid any material mistakes.
All remaining time should be spent on projects that are going to enhance company profits. This means getting involved in the design of products, and constraint analysis, and making sure that unusual expenditures don’t happen again.
What the cost accountant should not be doing is compiling the same old cost reports, month after month, about how much the same old products cost.