Cost information is a critical element of profitability. Costs can be controlled to a much greater extent than revenues…and have a higher degree of logic and clarity. Why then is costing so confusing, conflict ridden, and generally under- or wrongly analyzed? And, more importantly, how can we go from conflict and confusion to a state of coherence and relevance?
First, cost information suffers from a “perspective problem”. The financial information myth of “one version of the truth” shoves cost information into a product or service perspective and subjects it to distorting financial reporting rules that do not support its use for internal decision support. So, step one is to recognize the vast difference between “Cost Accounting” – done purely for financial reporting and subject to those rules; and “Managerial Costing” which is done purely for internal decision support and subject only to the Principle of Causality to reflect logic and the scientific method.
Second, costing has a “methodology problem”. Academics refer to costing “TLA’s” or three letter acronyms. Frankly, all of the methodologies have something to contribute to internal decision support…but each us been sold and promoted as an “ultimate” solution. So, step two is for the accounting profession to create a structure and stable body of knowledge around costing for internal decision support that promotes it as a decision science…to rein in the hype and puffery and acknowledges the need for a cause and effect cost model. This will promote more education and fair evaluations of the various methods’ strengths and weaknesses.
Profitability Analytics uses the IMA’s Conceptual Framework of Managerial Costing (CFMC) as the foundation for costing as a decision science. It can be used for analysts to learn and professors can teach costing as a decision science for internal decision support. It provides principles, concepts, and constraints that are comparable across all methodologies. It focuses purely on cause and effect based internal decision support, not man-made regulatory requirements or rules. If an organization’s cost information for internal decision support does not substantially apply the principles and concepts of the CFMC, the CFO should be held accountable for a failure of professionalism by peers, the CEO, and the Board of Directors.
Is there a need for a separate cost system for internal decision support? My opinion is absolutely! But I know this is not a widely accepted view. Most companies that specialize in managerial costing solutions recognize that spreadsheets, ERPs (that claim to do it all), and do it yourself analyses are their primary competitors. The gap between financial accounting rules and standards and managerial costing principles is simply too vast for most reasonably complex organizations not to have a separate internal decision support system. The sooner this reality is widely recognized, taught, and promoted as an essential practice…the sooner the accounting profession will be able to live up to the promise of being a fully capable business partner.