Page 192 - Accounting Best Practices

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9–11 Revise Traditional Cost Accounting Reports
plenty of valid information in such a report, there is no easy way for a busy
executive to determine where it is. Instead, it should be grouped into relevant
categories, such as clustering all product variations into a single summary
number or clustering product sales by customer. These clusters should always
contain subtotals so managers can take in the total cost impact of each group at
a glance.
• Give rapid feedback. There is no point in compiling a perfect cost analysis if
it is done months after a product is produced. Instead, a good cost report
should be issued as soon as possible after a product is completed, allowing
management to make changes to improve costs the next time the product is
made. The best case of all is when a cost report is issued to management
while a product is still being made (and preferably near the beginning of a
production run) so immediate alterations will result in a rapid cost reduction.
• Only report on exceptions. Some companies have such enormously long cost
reports that there is no way to glance through them and spot the problem sit-
uations. To resolve this issue, reports should be issued that only show excep-
tions. For example, a report may only show those products with negative cost
variances of at least 10 percent. By doing so, a voluminous report can be
reduced to a short memo revealing those items requiring immediate atten-
tion.
• Report on costs by customer. All too many cost reports only focus on product
costs, not the total costs of dealing with each customer. By widening the focus
of a traditional cost report to include this extra information, one can reveal
some startling information, especially if a customer that was previously
thought to be highly profitable is eating up an outsized proportion of a com-
pany’s resources in such areas as purchasing, warehousing, and order entry.
• Use direct costing. Many costing reports only show product margins after over-
head is included in the total costing mix. However, if the overhead allocation is
not valid, management has no way of knowing what margins really are and usu-
ally ends up ignoring the cost reports entirely. An easy way to avoid this prob-
lem is to insert an extra pair of columns in the cost report, in which are inserted
the dollar margin after direct costs (i.e., price minus labor and materials) and
the direct cost margin percentage. Though this variation leaves no room for
any overhead cost at all, it does result in a good analysis of direct costs.

These best practices focus on assembling information into a format that is
easy to read, relevant, and does not require the reader to wade through vast
amounts of data, and presents information as rapidly as possible. By installing
them, one can make the existing cost reports much more relevant to the deci-
sions that management must make every day.
Cost: Installation time: