I recently had an exciting conversation with Kris Moreels, founder and managing partner of B&M Consulting, a firm that specializes in designs of managerial accounting and strategy execution performance management systems. Kris and I share a common history as management consultants engaged by organizations to improve a weak and deficient managerial accounting system. He made the profound statement with which I titled this article, “Is it better to have no costing than bad costing?” What did he mean?

The prevalent thinking is that an organization’s managerial accounting system will calculate costs differently than its financial accounting system. This is because financial reporting must comply with regulatory rules for external compliance reporting typically that oversimplify the rigor required to calculate the relatively more accurate costs from a managerial accounting system. Of course, the culprit here is the allocations of indirect and shared expenses. Traditional cost allocations apply convenient broadly averaged factors, such as using number of department employees or direct labor input hours, to reassign indirect expenses to product costs. more

From the top desk to the desktop, in many organizations there can be a wide divide between the executives in their large corner offices and the managers and employees. The separation I am referring to is between the strategy formulated by the executive team and the employees tasked to implement it. It is rare that there is a good connection between the two.

As evidence, at the 2009 annual conference of the balanced scorecard organization, The Palladium Group, led by Dr. David P. Norton and Dr. Robert S. Kaplan, in Dr. Norton’s keynote presentation he stated that seven out of ten organizations fail to successfully execute the strategy designed by its executives. What explains this? Advocates of strategy map and balanced scorecard methods believe that this is in large part because most managers and employees do not adequately know what their organization’s strategy is. For example, if I randomly interviewed 15 of your organization’s employees in a hallway and said, “Quick! Explain your executive team’s strategy!,” how many of them could describe it well? Maybe none. What’s the consequence? If employees and managers do not understand the executive team’s strategy, then how can we expect them to understand that what they do each week and month contributes to achieving that strategy? more

There is a widening gap between what the CFO and accountants report and what internal managers and employee teams want. This does not mean that information produced by the accountants is of little value. In the last few decades, management accountants have made significant strides, such as with activity-based costing (ABC), in improving the utility and accuracy of the costs they calculate and report. The gap is being caused by a shift in managers’ needs – from just needing to know what things cost (such as a product cost) and what happened – to a need for detailed information about what their future costs and profits will be and why. Examples include driver-based rolling financial forecasts and true marginal cost analysis for what-if scenarios.

Despite accountants advancing a step to catch up with the increasing needs of managers to make good decisions, the managers have advanced two steps. In order to understand this widening gap, and more importantly how accountants can narrow and ideally close the gap, let’s examine the broad landscape of accounting. more

Here is a fictitious story. But how true could it be?

Our company’s quarterly financial results were just announced. Our loss was unexpectedly double last quarter’s loss, and we have now been in the red each quarter for over a year. How can this be happening to us? Our company has been profitable for decades!

I can track the meetings, phone calls, and e-mails among our managers from the moment the CFO’s staff calculated this quarter’s disappointing financial statement.

The Blame Game

When our CEO first received and saw the bad news, she immediately questioned the CFO as to whether there was an accounting error. Nope. The CFO reported that sales were down 2 percent, but the bottom line tanked at the product gross profit margin line and it worsened further at the operating profit level due to overbudget distribution, selling, and marketing expenses.

The CEO called our Operations VP into her office and asked what happened. Our Operations VP pointed his finger at the excessive distribution expenses – specifically, all the emergency premium shipments.

The CEO called our materials manager into her office for an explanation. He observed that production was missing many customer order ship due dates, requiring costly overnight and premium shipping expenses to lessen the damage to our customers’ satisfaction and loyalty. He pointed his finger at the production manager. more

Let’s look back at the last ten years of applying enterprise performance management methodologies, and then speculate about their next ten years.

THE PAST DECADE

The beginning of this past decade witnessed more experimentation with techniques like strategy maps, balanced scorecards, product and customer profitability analysis, and driver-based budgeting. Much of this was done with spreadsheets with increasing use of commercial software. more