High Performance through Cost Accounting: Confronting a New World of Higher Production Costs and Greater Volatility

Accurate cost accounting and inventory valuation is vital for companies intent on achieving high performance.

However, growing complexities in cost structures driven by greater price volatility and fluctuations for commodities and base materials have created significant challenges. Accenture outlines the problems and identifies solutions to create an enterprise-wide cost-accounting process that will help companies enhance predictability and control over profitable growth.

Cost accounting and inventory valuation is a critical capability for companies, allowing them to enhance predictability and control over profitable growth. However this function has become substantially more difficult recently, due to far more complex cost structures, which have been driven in part by greater price volatility and fluctuation for commodities and base materials. As a result, manufacturers and distributors—regardless of geographic location or product rendered—face significant challenges in their ability to value current inventory and predict and control costs.

This volatility and variance in costs has implications throughout the enterprise, reinforcing the need for a more comprehensive cost accounting and inventory valuation capability.

To address this issue, many organizations require a more robust cost-accounting capability. This capability must be predictable, repeatable, and scalable, and it must account for more dynamic cost variability. In addition, it must be integrated throughout all areas of the enterprise, as opposed to the current approach at many companies, in which the cost-accounting function effectively occurs in a silo within the finance department.

Only those companies that have a strong grasp of their costs—not only in conventional areas like sourcing but throughout the enterprise—may be able to maintain and even enhance profitability in the face of rising costs for commodities and other production materials.

Current levels of volatility can be the basis for intense consternation when selecting an inventory valuation method for managerial accounting and reporting. The two methods most commonly considered are standard cost and moving average cost (MAC).

Although moving average cost is typically easier to manage, standard cost provides a basis for increased accountability throughout the organization. In fact, when properly administered, the standard cost method should closely mirror the actual cost method. Standard cost is widely used by manufacturing companies for managerial reporting because of its strengths in cost control. In addition to managerial reporting, companies must also consider the implications for statutory reporting (e.g., financial, tax) when evaluating an inventory valuation method and costing process.

Standard costing is widely used by companies that use SAP’s Product Costing functionality. It allows enhanced analysis and transparency into the manufacturing process, since many of the cost fluctuations from materials, labor and overheads are more easily identified. In many respects, MAC can mask cost fluctuations, both positive and negative. This makes it more challenging to analyze margin results.

Once companies develop a better grasp of their inventory valuation and costing data, they have a range of options in mitigating the impact of rising and volatile production material costs.

Approaches include:

• Altering packaging to reduce volume while holding retail prices consistent.

• Taking a more comprehensive approach that includes raising the price of some products; adapting the production process for others; and trimming selling, general and administrative costs.

• Passing along higher costs to consumers, especially if the price-sensitivity of segments is known.

• Developing a more sophisticated sourcing strategy.

While all of these approaches can be effective for various sectors, they represent what is possible once companies have an accurate and comprehensive understanding of their inventory and cost data.

Most importantly, the costing and inventory valuation process should not be limited to the finance department. Because of its implication throughout the organization, the  engineering, production, purchasing, sales and marketing, and human resources functions should play a larger role, specifically by providing more accurate and comprehensive cost data at the front end.

Les Stone is senior director-Finance and Performance Management and is based in Accenture’s New York office. He is a Certified Public Accountant specializing in financial business process improvement, finance and accounting operations, shared services and finance operations strategy. Stone has held senior finance roles with a Fortune 150 firm and has more than 35 years of practice experience. With his extensive skills in strategic planning, transportation and logistics, information technology, and deep experience in manufacturing, distribution and retailing, Stone guides global companies on their journey to high performance.

Doug Derrick is managing director-Management Consulting for Accenture and is based in Atlanta. He leads Accenture’s North American automotive, industrial equipment, infrastructure and transportation services management consulting group. With extensive strategy, logistics, operations and dealer development experience and capabilities, Derrick and his team help clients address and deliver on the toughest management and performance issues.

George Marcotte is senior director-Accenture Analytics and is based in London. He leads Accenture’s Enterprise Analytics offering group in Europe, Africa and Latin America as well as the Enterprise Performance Management Strategy Group globally. Specializing in targeting and delivering value, Marcotte helps clients improve their productivity and elevate their business results.