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“How much is that little widget in the window….?”

May 19th, 2008

     Not sure about you, but I am constantly amazed by the number of companies that do not have a firm handle on their ability to successfully cost product and understand what the true cost of their manufacturing operations are.  These are not smaller companies who are working on some home-grown spreadsheet or an ERP system that was implemented by consultants and they never got a firm grasp on the intricacies.  No, these are “world class” organizations that are using massive “buckets” to just dump in their costs and see what comes out the other side in their Operating margin or EBIT calculations.

     I originally took a prior position as I did not have any cost accounting experience and a business mentor of mine advised me that this would be a key area for me to fortify on my resume.   I was fortunate enough to hire in to a company that had a Controller who had a solid 25-years of cost accounting and controllership experience, who was also gracious enough to teach me what he knew and to help me apply it in my ongoing analysis and forecasting. Eventually, I was promoted to the North American CFO position, and while he reported into me, we had a fantastic working relationship that was very complimentary to our mutual skillsets.

     In this particular company, he had been a key factor in developing a rather comprehensive ABC (activity based costing) system that provided us tremendous insight into each one of the product families we manufactured in Southern California. Come the end of the month, when it came time to draft our monthly management letter, we would review each one of the product families and could specifically identify each of the contributors to the variance within each product family. While we were constantly being challenged and questioned by our corporate team in France, our reporting always withstood the scrutiny. 

     We tended to be our own worst critic and were constantly striving to increase the accuracy of the reporting and using the data to identify areas of opportunity for further improvements.  Under an environment of drastically increasing metal prices, this constant effort allowed us to actually increase our margins, when if all things were held constant, they should have declined in a rather material way. 

     What I learned from my friend and colleague, I was able to roll into a Project-based costing system to track our large systems.  These were the custom bid systems that could take anywhere from a month to a year to complete, after we successfully bid the project.  But more on this approach tomorrow……

Thanks for reading.

Jeffrey

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