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Improved Costing Practices Enhance Supply Chain Management

  • APICS partners
  2018

APICS and the Institute of Management Accountants (IMA) recently conducted a survey of ASCM Members to gauge the extent to which organizations struggle with costing practices. Specifically, the study investigated common failures with the decision-support information that accountants provide to line managers and executive teams. 

The value of effective managerial costing systems is clear. When asked about the importance of costing systems, responses included: “The cost system plays a critical role in the sales and operations planning process,” “An accurate costing system is extremely important to supply chain decision-making,” and “Costing information is fundamental for decision-making.”

Participants also were asked questions about the usefulness of the costing information they receive. Overall, costing systems are perceived as being somewhat useful; however, there is some discontent. For a wide range of applications — including budgeting and planning, product decisions, process improvement, and customer profitability analysis — respondents on average “somewhat agreed” that the costing information they receive is effective. Furthermore, nearly all participants agree that the benefits derived from improving a costing system would exceed the investment.

The most commonly cited reason for why costing systems are viewed as only marginally effective is a lack of operational data, reported by 44 percent of respondents. Providing information only in financial, and not operational, terms also is a common failure. This results in non-actionable information and missed opportunities. The lack of adequate information technology (IT) resources, reported by 39 percent of respondents, is another issue. A third barrier, cited by 30 percent of participants, is resistance to change by accounting personnel. (See Figure 1.) 

Only one-third of survey respondents indicate that they turn to supply chain management professionals for cost information when making business decisions. Rather, most people rely on accountants. This is unsurprising, given the perception that the information provided by costing systems is only somewhat useful. (See Figure 2.)

Improved Costing Practices Enhance Supply Chain Management

The perception of the accounting and finance function by supply chain management professionals is similar to their view of their organizations’ costing systems: There is slight agreement, on average, that accounting and finance staff are responsive to requests for specific cost information, that they aren’t viewed as full business partners, and that they provide useful costing information. The perceived role of the accounting and finance function ranges from “bean counter” and “profit police” to “business partner” and “team member.” A general conclusion is that line managers and executives are being underserved or even mislead by their accountants.

One specific area for improvement is in planning, budgeting and forecasting, where respondents somewhat agree, on average, that it is a top-down exercise. Respondents neither agree nor disagree that it is an enterprise-wide process linking operations and the executive team’s strategy with finance. This view of the planning, budgeting and forecasting process is not confined to supply chain professionals.

Root causes

One survey respondent said, “Accurate costing is the base for all supply chain decisions.” Another asked, “How do you know anything about the health of your business if you don't know your cost? You can't really — it’s just gut and guess.” Yet, the results of this survey show that supply chain management professionals often view their company’s managerial costing systems as only slightly useful for generating questions and making managerial decisions. Based on the results of this and other recent surveys, there are three main root causes of this problem:

1.  Many organizations rely on externally oriented financial accounting systems to produce information that supports internal business decision-making. These systems employ oversimplified methods of costing products and services and do not focus on modeling detailed operational cause-and-effect relationships. This creates distortions in product costs or the misstatement or exclusion of critical performance measures in product costs. 

2.  Externally oriented reporting systems typically focus on costs above the gross profit margin line and fail to provide adequate information about customer and channel-related costs.  The result is that most companies lack the ability to report on customer and channel profitability. This hampers supplier and vendor selection, as well as in-sourcing, out-sourcing and offshoring decisions.

3.  Since the 1980s, many innovative managerial costing practices have arisen to meet the needs of today’s organizations. These tools include a better link between operational and financial information and a focus on the causal relationship between customers and the products, services and supplier resources they consume. Most accounting and finance professionals continue to employ outdated systems of limited operational usefulness. They may have computerized the old tools, but they have not updated them.

Better decision-making

To address this situation, users of cost information must demand accurate and relevant, reality-based decision-support information from accounting and finance staffs. The question is not, Is there an answer? The question is, How do we get accountants to face the problem and implement solutions that will create and improve cost information?

Top managers must require the adoption of progressive, internal management and decision-focused costing practices that represent the fundamental economics that underlie business operations. They need to create a culture in which cost information is trusted; seen as consistent and reflective of the resources and processes being managed; and, most importantly, used to make better decisions.

— Raef Lawson, Ph.D., Vice President of Research and Policy, IMA

To read the full APICS and IMA report, visit apics.org/costingsurvey.

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