Home > CorpFin Cafe, Mfg / Costing > “How much is that little widget in the window?” – Part II

“How much is that little widget in the window?” – Part II

May 21st, 2008

     I left off after Monday’s commentary with a summary of the activity based system we had implemented at a prior company and how our Controller was a good friend and colleague who I had learned so much from.  But we weren’t a single method system at that company, which necessitated the need for a bit of a hybrid system.

     Since approximately 40% of the revenues were project-based systems, a simple ABC structure was not going to do. These were complex projects that involved individual and custom bids for each customer. These bids might range from the mid-six figures to as high as $10-$15 million.  While we had to have a basis for the bid, which typically reverted back to our activity based system, we still had to develop custom bids that were constantly fluctuating with what our competitors were doing.  We encountered some pretty significant differences in margins, which ultimately depended on the customer as well as the product family that was involved in the bid.

     What we were lacking when I had first arrived at the company was a reporting structure that allowed us to track the progression of our margins from the bid stage of the project until the time we shipped the product to the customer. Make no mistake, it was a painful process to put this in place and gain the cooperation of all parties involved. This was not just a Finance function either. It took the cooperation of Finance, Sales, Engineering, Technical Solutions, Services, and a number of other key individuals. It also took quite a bit of time to put the discipline in place to be able to obtain the information.  In the end, we had reached a point that if we had a margin variance at the time of shipment versus what was originally bid, we could tie it to customer change orders, non-performance on our part, increases in material pricings, installation issues, or whatever other action caused a change in our margins.  For the better or worse.

     We were able to accomplish this level of reporting because we had an excellent costing structure in place, clearly understood our manufacturing process, and pressed ourselves to improve our performance. Unfortunately, much of this reporting was not considered a priority during the merger. While it was considered a priority in discussion, the reality of following through on the effort was overshadowed by the energy required in the merger.

     What prompted me to write the last two entries is the lack of comprehensive costing information that most companies have to work with and the valuable information they provide for making strategic decisions and operating as a “world class organization”. 

What is the state of your costing structure? Do you have the information you need to make appropriate business decisions and drive better performance in your company?  Only you know the answer to that one……

Thanks for reading,


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