Page 188 - Accounting Best Practices

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9–9 Review Cost Trends
For example, one inch of tape on a bill of materials will have a quantity of one,
and a unit of measure of ‘‘IN,” or ‘‘inch.” However, if the unit of measure is
changed to ‘‘RL,” or ‘‘roll,” without a corresponding reduction in the amount of
tape listed in the quantity field, the amount of tape picked for production will
increase from one inch to an entire roll. The same problem applies to the inven-
tory, where a change to the unit of measure field without a corresponding change
in the quantity field will result in a potentially massive change in the amount of
inventory on the books. This seemingly minor issue can result in a major change
in the cost of goods sold.
The best practice that resolves this problem is limiting access to the unit of
measure field in the computer system, preferably to one person or position. By
doing so, all changes must be reviewed by one person, who will presumably be
trained well enough to realize the relationship between units of measure and
quantities. If access by multiple people cannot be avoided, then a less-reliable
variation is to require approval by a manager before making a change. However,
as someone can make a change without approval, this system is too easy to
bypass. A third variation is to carefully review changes in the unit of measure
fields after the fact, perhaps with an occasional internal audit, but this approach
only finds problems after they have already been made; the best solution is
always to keep the problem from occurring in the first place.
An excellent alternative is to set up the computer system so that multiple
units of measure are allowed. To use the previous example, the roll of tape can be
listed as both one roll or 1,760 inches in the same inventory or bill of material
record; this approach eliminates anyone’s need to change the unit of measure
field, since all possible variations are already described. Unfortunately, only the
more advanced accounting and manufacturing software packages contain this
feature; it is not normally available unless a company is willing to invest in some
complicated and expensive programming.

Cost: Installation time:

9–9 REVIEW COST TRENDS
The typical cost accounting report shows the current cost of each product, per-
haps 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 facil-
ity) or to material cost changes. Given the lack of information, management has
no way of knowing if the current costing situation reflects a deterioration in costs
or an improvement.