In a well-known consumer goods company boardroom, the CFO proudly displayed a slide: "Our flagship product delivers a 45% gross margin. It's our crown jewel."
Six months later, the company was executing mass layoffs to prevent a liquidity crisis. But... What went wrong?
When we applied Activity-Based Costing, the harsh reality emerged: that "crown jewel" was profitable only if we ignored complex logistics costs, intensive post-sale support, and channel discounts that cannibalized its value. In reality, it generated a 12% net loss on every unit sold.
This isn't an anomaly—it's a symptom of a silent epidemic. 18% of business failures stem from pricing and cost errors, while nearly 30% drown in liquidity crises. They don't die from lack of sales; they die from the arrogance of making critical decisions with fundamentally flawed data.
This isn't a technical failure. It's institutionalized blindness.
The Questions We Can No Longer Postpone
This reality forces us to confront the questions our daily routines prevent us from seeing:
- Why do we continue using cost information that doesn't reflect operational reality?
- What are the real consequences of deciding with data that ignores time, capacity, and actual customer profitability?
- What proven alternatives exist to escape the "accounting blind zone"?
- How do we transform the controller from an expense recorder into a value architect?
1. The Precision Mirage: Accounting Designed for Another Era
Traditional cost accounting was born for 20th-century mass manufacturing. In that world, direct costs (materials, direct labor) represented up to 80% of total costs. Allocating indirect costs based on volume metrics, such as labor hours, was a reasonable approximation.
But today's world is radically different:
- Over 70% of costs in service and advanced manufacturing companies are indirect or shared
- Product, channel, and customer structures are exponentially more complex
- Value is created and destroyed through customization, support, reverse logistics, and switching costs
Yet, most companies continue to apply average-based costing models as if they were manufacturing the Ford Model T in 1925. As academic Charles T. Horngren warns: "Traditional accounting can be mathematically precise... but strategically irrelevant."
2. The Consequences: When Your Map Leads to the Cliff
The distortions of average costing aren't theoretical debates—they're million-dollar mistakes that destroy value daily.
Real Cases of Hidden Value Destruction
🏦 Financial Services Reality Check A leading bank maintained a "premium" credit card line believing it was their most profitable product. ABC analysis revealed that high acquisition costs and intensive support for low-usage customers resulted in a resource hemorrhage, resulting in $2.1 million in annual losses.
💻 SaaS Wake-Up Call: A software company celebrated exceeding customer acquisition targets. Life-cycle Costing analysis revealed that 40% of new customers had a negative Lifetime Value (LTV) due to high churn rates and intensive technical support requirements during the first 90 days.
Critical Qu
.
estion: Is your company subsidizing your worst customers with profits from your best products?
If you haven't applied advanced costing models, the answer isn't "maybe." The answer is yes
3. The Strategist's Toolkit: ABC, and Life-Cycle Focus
We're not defenseless against this complexity. Modern management accounting offers a proven arsenal:
✅ Activity-Based Costing (ABC)
Assigns indirect costs based on activities that consume them. Finally, answers: Which products, customers, or channels devour our capacity and which optimize it?
Real Impact: A logistics company discovered through ABC that 20% of their clients generated 80% of "special case" and exception costs, destroying contract profitability.
A more agile evolution using time as the sole driver. Easier to implement and maintain, brutally revealing idle capacity.
Hospital Case Study: TDABC revealed that 35% of nursing staff time was spent on administrative tasks unrelated to patients. Process redesign freed hundreds of hours for direct care.
✅ Life-Cycle Costing (LCC)
Measures product profitability throughout its entire lifecycle, from R&D to retirement. Essential to avoid the trap of successful launches becoming maintenance nightmares.
4. Strategic Cost Transparency Matrix
|
Hidden Costs (Averaged) |
Explicit Costs (Traceable) |
| Traditional Approach |
Blind Zone: Decisions without relevant data. 90% of companies live here. |
Illusion Zone: Irrelevant details without strategic vision ("analysis paralysis").
|
| Strategic Approach |
Risk Zone: Major decisions (restructuring) with a poor data foundation. A gambling game. |
🟩 Power Zone: Decisions with traceability, relevance, and value focus.
|
5. The Future Controller: From Accountant to Strategic Architect
Transforming the cost model isn't a finance project—it's a mindset shift and a new mandate for the controller. The New Role Demands:
- Questioning sacred metrics
- Translating complex data into clear, direct decisions
- Modeling scenarios with real operational impact
- Leading the adoption of advanced analytical tools
Transformation Roadmap:
Phase 1: Diagnosis (1 week) Identify three key strategic decisions being made with potentially misleading cost information.
Phase 2: Pilot (90 days) Apply ABC/M to one critical business unit or product line.
Phase 3: Expansion (6 months) Integrate findings into management reporting and performance KPIs.
Phase 4: Culture (Ongoing) Train business leaders in strategic reading of new cost and profitability indicators.
6. Accounting Relevance Matrix
|
Low Precision |
High Precision |
| Low Strategic Impact |
Traditional Accounting: Useful for legal compliance, useless for strategy. |
Perfection Without Purpose: Detailed models without connection to key decisions.
|
| High Strategic Impact |
Heuristics & Estimates: Useful in urgent decisions, but high risk. |
🟩 ABC/LCC: Clear vision driving high-impact strategic decisions.
|
Conclusion: What Isn't Measured Well, Costs Too Much
"If you don't know what it costs you, you're already paying too much."
Clinging to obsolete accounting models isn't financial conservatism—it's strategic negligence. The tools exist, the knowledge is available, and the success cases are irrefutable. The only missing piece is the decision to act.
What Now? Three Questions That Could Define Your Future
Your career and your company's future might depend on these answers:
-
Is your current cost system reflecting operational reality or merely a compliance exercise?
-
Can your finance team defend strategic decisions with unquestionable customer and product profitability data?
-
Do you know with certainty which products, services, or customers are destroying value in your organization right now?
If the answer to any of these questions is "no" or "I'm not sure," the time to act isn't next quarter.
It's now.
Because ultimately, this isn't about accounting.
It's about survival.
Pedro San Martín is the Principal at Asher PwC Interamericas. He can be contacted at psanmartin@asher.company