Manufacturing Cost Accounting Assessment- Is Your Team Competent?

Cost Accounting Assessment

An overview of a cost accounting assessment to improve variance analysis and performance visibility.

Why does an organization need a cost accounting assessment? As I shared in my article yesterday, there are quite a few problems -> Why is it so hard to find a good cost accountant?

1. A rapid change in technologies for cost accounting

2. Limited Career Path in Cost Accounting

3. Lack of appreciation for what cost accountants do

4. For most organizations, an average cost accountant is all they need; most of the time

Overall, cost accounting is usually an overlooked role and skillset, where many other people in an organization looking in from the outside assume everything is just fine with the staff they have.

However, if you want to really assess how good (or not) your cost accounting function is, you can go through the following checklist of questions. Afterward, you can decide what’s next for the profitability of your organization.

1. Does the staff have the appropriate skill and business knowledge level?

• a.      Does the analyst have beginner, intermediate, or expert-level knowledge of cost accounting concepts and their application to their employer’s industry?

• b.      Does the analyst have the experience and capability to develop data into insights?

• c.      Does the analyst understand the business processes?

Explanation:

What this question will try to reveal is whether your cost accounting function is just checking the boxes and performing a technical accounting function devoid of the nuances and customization of their approach according to the challenge at hand. If a cost accounting function shows little interest in understanding how the organization works and have a comprehensive understanding of the business’s processes that produce the data they work with, this would be a red flag.

2.    Is the ERP system optimized to support the business?

• a.      How is data extracted from it? Using reports or a reporting tool/interface?

• b.      Does an API interface exist that can be used?

• c.      Does the organization have the appropriate IT support level to obtain maximum value from the system?

• d.      Does the data required for analysis come from one system or multiple systems?

Explanation:

This question is designed to reveal whether your cost accounting function has made the important step of running canned reports out of the ERP system to dive deeper to access the system’s data when and how they need it to work.

Often, IT resources have other priorities and just don’t seem to understand why running reports isn’t good enough for the accountants. Developing expertise and familiarity with an ERP system require getting hands-on and developing tech-know-how.

In addition, if there are multiple systems of interrelated data and there has been no initiative to combine them in a data model, the analytical capabilities are not as robust as they could be.

If a cost accounting function has no idea how the system works and is not curious about finding more novel ways to access data, such as through API, comfortable with just running reports, this would be a red flag.

3. What is the quality of the data?

• a.      What are the known issues preventing analysis from being performed and trusted?

• b.      Does the organization have visibility into actual costs vs. standard costs for raw materials, intermediates, & finished goods?

• c.      Are standard labor/machine routings set up in the system? If so, are they compared to actuals?

• d.      Are all materials purchased, consumed, and sold tracked at the appropriate SKU level and quantities?

• e.      Are inventory balances accurately reflected in the system?

• f. How frequently are cycle counts completed and processed?

Explanation:

Every good cost accountant should have a passionate opinion about the data quality in their organization. If cost accountants have investigated variances and anomalies down to their core, they will know what isn’t quite right in the system and why, and they will usually have a plan to fix the problems.

If a cost accounting function has no interest or experience in diving deep into the data to prove out or debunk their theories, then an innate level of curiosity is missing.

For example, an organization can show a balance sheet account that is reconciled by rolling it forward each month. It may appear everything checks out.

However, a good cost accountant would ensure the beginning balance and activity from initiation to the current day is accurate or else have been remedied.

In addition, if the cost accounting function hasn’t devised a way to calculate the true, not standard costs of just about everything by tapping into the data, then another red flag would go up for me.

4.      Are the manufacturing processes documented and understood?

• a.      Is a process map available?

• b.      Are financial results shared and discussed with operations? If so, what are the common narratives/themes?

• c.      Are labor hours tracked?

• d.      Are material consumptions accurately recorded on production orders tied to BOMs?

• e.      Are the BOMs (Bills of material) up to date and reflect the current manufacturing process and yields?

Explanation:

A foundation of great cost accounting is knowing a business’s processes inside and out. Correspondingly, they should have a clear idea of where the opportunities for improvement lie and should have been working on these.

Nothing is ever perfect or complete with an organization’s processes and data, so there is usually something new or interesting to investigate and understand.

Even more, keeping an ear out to understand how close the cost accountant is with the plant and production staff will indicate whether there is a close connection between data and processes. If a cost accounting function doesn’t seem interested in working closely with the business or knowing how accurate the current system configurations are to reality, this would be a red flag.

5.      Do the financial results make sense from a high-level overview compared to the narrative from production?

• a.      If not, where are the gaps?

Explanation:

From a cost accountant’s perspective, everything appears fine, while the financials have blown a massive hole. Sure, the account balances tie in, but do they make sense?

If the accountant says everything is fine, while a sudden loss has appeared that no one can trace down, this is a real problem and a clear sign that the cost accountants aren’t high-quality.

Cost accountants should work closely with operations and executives to understand and validate expectations regularly around production volumes and margins.

If the cost accountant and other stakeholders are at odds with each other and speak different languages, often appearing frustrated, this would be a red flag.

6.      Are raw materials procured on a contractual basis/pricing or at market prices?

Explanation:

Depending on how an organization purchases raw materials, I would expect the system configuration to follow suit to ensure inputs are accurately recorded and flow through the production process so the total cost of production can be accurately understood as market conditions shift.

For example, if an organization uses standard costing, the price for a raw material may appear constant throughout the year.

However, suppose the real price fluctuates, and everyone speaks in terms of the static standard cost as their go-to gut check number. In that case, it’s almost assured that poor decisions will be made regarding the total cost of production and selling price required to maintain margins.

For organizations with a passthrough arrangement for raw material costs, the costing system and function must develop robust processes to ensure all of these costs are passed or correctly instead of being absorbed by the organization’s margin.

7.      How often are financial & operational results currently generated and shared?

• a.      Who owns this process?

• b.      Is the process only monthly? If so, why?

• c.      Is there anything preventing weekly/daily reporting

Explanation:

Suppose financials and operational metrics, especially around the efficiency of the most valuable raw inputs, are only reported monthly or bi-weekly, whether labor hours or raw material yields. In that case, there is a good chance money is being lost and unaccounted for.

If a cost accounting function isn’t reporting on the metrics that matter daily, if not weekly, then operations is essentially flying blind. Ideally, a cost accounting function should work closely with other stakeholders to understand what matters to track and communicate frequently and then have built and tuned processes to meet those needs.

If stakeholders are dissatisfied with the cost accounting function or have a weak relationship, the cost accounting function is weak.

Even more, if the results are generated by running reports out of a system rather than through some sort of data modeling or dynamic reporting tool that can drill down from high-level summary to complete granularity, another red flag goes up.

8.      What metrics does the organization want to track?

• a.      What frequency should metrics be produced, reviewed, and shared?

• b.      What level of granularity is desired from a reporting perspective?

 Explanation:

If an organization needs to chase down the cost accountant to perform an ad-hoc analysis for what should be routine analysis, then something is off. Cost accounting functions should work closely to understand the organization’s needs and turn it into a regular, automated analysis.

If they have deja vu and stakeholders feel like they are repeating themselves, then another red flag goes up.

Manufacturing Cost Accounting Assessment- Is Your Team Competent?

1. Standard Costing’s Time Has Finally Come

2. 30 Strategic questions to ask senior leaders about standard costing

3. Average Costing Will Replace Standard Costing- 27 Reasons Why

4. Standard Costing- What Is It, Why It Matters

5. The “Is Your Finance Function Competent?” Checklist

6. Here’s What Your Management Accountant Doesn’t Want You To Know

If you’re interested in having an in-depth assessment of your organization’s cost accounting function performed by expert cost accountants, send me a note at benjaminwann1@gmail.com to get the resources you need to succeed.

Updated: 5/21/2023