Page 142 - Finance for Non-Financial Managers

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Cost Accounting
observers of a company
don’t want or need to see.
of management accounting
It’s a detailed, often compli- Cost accounting An area 123
that deals with the costs of
cated process of counting a business in terms of enabling the
small amounts of money, managers to identify, measure, and
materials, and labor. Yet control gross profit.
these small elements of
cost, when multiplied by the number of units a company makes
and sells over a month or a year, become the foundation for the
profit that outsiders are anxious to see from companies they fol-
low. Cost accounting, then, is the ultimate example of internal
management reporting: it’s in a form designed for managers to
use in running the company and not particularly user-friendly to
those unfamiliar with the company or the business.

Are You Making a Profit or Just Building Sales Volume?
I’m sure you remember that old cliché, “We’re losing money on
every piece, but we’re making it up on volume!” That clever bit
of shtick that makes everyone laugh is not so funny in many of
today’s companies, particularly the ones that don’t have a
strong cost accounting analysis function in their financial
department. Accounting for all the variety and complexity of
costs that go into manufacturing a product today is among the
most difficult areas of finance to manage. Part of the reason is
that information about cost of sales requires additional levels of
data collection, some of it from segments of the company most
removed from the financial recordkeeping function, the factory
worker. It’s on the shop floor that costs are incurred, fabrication
decisions are made, and hours are spent productively or waste-
fully—and it’s the factory worker who will ultimately determine
if the company has a comfortable gross profit or none at all.

Profit Management Begins with a Timecard and
a Bill of Materials
Key to gross profit management, then, is collecting the right
information at the right level of detail. One of the most chal-