How Well Does Management Accounting Perform as an Organization’s “Gatekeeper?”

A gatekeeper is an individual who controls access to something. Ancient cities had gatekeepers whose job was to keep out undesirables. A college admissions officer is a gatekeeper who controls the makeup of the school’s student body. A newspaper editor is a gatekeeper who decides which stories will be included in that day’s edition. Gatekeepers are critical to an institution’s security, quality and overall success.

Businesses have gatekeepers as well. They control access to the company’s resources. Their job is to insure that only business that enhances the company’s ability to meet or exceed its financial objectives is permitted through the gate. They must be constantly on the alert because it only takes one gatekeeping failure to wipe out the financial benefits generated from scores of gatekeeping successes.

A key member of the gatekeeping team is, or at least should be, the management accountant. Although the market – not cost – ultimately determines the price a business can charge for its products and services, the cost of producing those products and providing those services is a critical component in determining whether that business should be allowed through the company’s gate. Effective managerial costing information must exist before the gatekeepers can consistently admit only desirable business and turn away the undesirable work.

Management accounting’s participation should begin during the development of the organization’s marketing strategy. Marketing must understand where the company’s “profit zones” lie. That encompasses not only knowing the cost of the products and services being sold, but also the cost of selling and supporting different products, product lines, customers, channels and markets.

Once a marketing strategy is developed and the revenue anticipated as a result of that strategy are projected, the management accountant should be able to model the profitability of that volume and mix of business. This requires two things; a predictive cost model of the organization that reflects the fundamental economics that underlie its operation and estimates of those “cost drivers” required to support that volume and mix. A projection of revenues only will not suffice. An estimate of the cost drivers will enable the management accountant to use the company’s cost model to project the cost of supporting that particular volume and mix. The results of that projection should then be fed back to the marketing team and used to evaluate and, if necessary, modify its strategy.

To be effective in supporting the development of its marketing strategy the company’s cost model must:

• be based on the principle of causality,

• be “predicitive” – have the ability of project costs under a variety of volume, mix and time period assumptions,

• include the cost of marketing and sales efforts,

• include order, fulfillment and customer service costs,

• consider capacity constraints and utilization, and

• measure costs, and therefore profitability, by product, product line, customer, channel and market.

Only then will it provide an effective gatekeeping tool for the organization.

To be successful, a 21st Century organization must insure that only business that will help it reach its financial objectives is admitted through its gates. The likelihood of that being accomplished, however, is significantly reduced when the strategy development team is provided with a seriously flawed cost information to use in evaluating potential business.