Performance Management Shared Interest Group

Financial information needs to step up with new approaches to reflect operational models, collect information that supports strategic and tactical decisions, and support the creation of value.

As a financial manager, you have had innumerable discussions (often heated) about the inadequacy of a company's cost information.  Operating managers feel they have been held to unreasonable standards, seen the impact of bizarre allocations, been subject to unrealistic performance requirements, and they have often monkeyed around with the costing model to create some sanity in an insane costing system.

The problem is that the only costing information most accountants create is focused on external financial reporting. Then they try to connect it to operations with variances and standards they learned in college. Though they won't often admit it, most accountants know this information is not useful and often impairs decision-making. The Institute of Management Accountants found in a survey some years ago that 98 percent of financial executives believe the cost information they supplied management to support decisions was inaccurate for decision support. (I think it is unlikely this has changed.)

Business leaders should expect better from the cost information used internally for analysis and decisions. For this information, there is no governmental regulatory agency enforcing rules, so chief financial officers can use any system, analytic technique or practice they find that will support the organization's decisions effectively.  Finance needs to begin listening to the needs of internal customers for increased financial insights for decision support and value creation analysis to become more of a business partner.

A few years ago Raef Lawson, Doug Hicks, Gary Cokins, Monte Swain, and I came up with a "Bill of Rights" concept for Cost Information Users.  You may find it useful: 

Bill of Rights for Managerial Cost Information Users

Definition: Managerial costing supports decision-makers tasked with optimally achieving their organization's strategic objectives. Decision-makers, at all levels of an organization, should be provided managerial cost information that:

• Clearly reflects the causal operational relationships of resources, their capacity and the processes that produce the organization's outputs.
• Calculates and reports reliable and actionable information on costs of processes, products, service lines, channels, missions and customers.
• Reflects the economic realities of the decision at hand, unhindered by external regulatory accounting rules.
• Is consistent with the organization's creation of long-term sustainable value or the long-term execution of the organization's mission.
• Doesn't lead to argument and debate about its usefulness and accuracy.
• Is readily available, sufficiently detailed and logically structured to improve visibility, facilitate analysis and provide insights.

Conclusion:  Decision-making is challenging in all circumstances. Decision-makers, at all levels of an organization, must demand that those providing cost information for their decision-making honor these rights that are essential to effectively execute their management responsibilities.

This approach is essential to enhance the success of your company. There is no excuse for failing to create effective managerial cost information for internal decision-making. The knowledge and techniques to do advanced managerial costing have been available for decades, and today's technology allows multiple financial models of the organization and interconnectivity with operational systems. Financial information needs to step up with new approaches to reflect operational models, collect information that supports operational decisions, and support the creation of value every day and at all levels of the organization.

How do your operational managers view the decision support information provided by finance?

Do you agree with the "Bill of Rights"?

What solutions have you implemented in your organization to improve decision support?

Financial information needs to step up with new approaches to reflect operational models, collect information that supports strategic and tactical decisions, and support the creation of value.

As a financial manager, you have had innumerable discussions (often heated) about the inadequacy of a company's cost information.  Operating managers feel they have been held to unreasonable standards, seen the impact of bizarre allocations, been subject to unrealistic performance requirements, and they have often monkeyed around with the costing model to create some sanity in an insane costing system.

The problem is that the only costing information most accountants create is focused on external financial reporting. Then they try to connect it to operations with variances and standards they learned in college. Though they won't often admit it, most accountants know this information is not useful and often impairs decision-making. The Institute of Management Accountants found in a survey some years ago that 98 percent of financial executives believe the cost information they supplied management to support decisions was inaccurate for decision support. (I think it is unlikely this has changed.)

Business leaders should expect better from the cost information used internally for analysis and decisions. For this information, there is no governmental regulatory agency enforcing rules, so chief financial officers can use any system, analytic technique or practice they find that will support the organization's decisions effectively.  Finance needs to begin listening to the needs of internal customers for increased financial insights for decision support and value creation analysis to become more of a business partner.

A few years ago Raef Lawson, Doug Hicks, Gary Cokins, Monte Swain, and I came up with a "Bill of Rights" concept for Cost Information Users.  You may find it useful: 

Bill of Rights for Managerial Cost Information Users

Definition: Managerial costing supports decision-makers tasked with optimally achieving their organization's strategic objectives. Decision-makers, at all levels of an organization, should be provided managerial cost information that:

• Clearly reflects the causal operational relationships of resources, their capacity and the processes that produce the organization's outputs.
• Calculates and reports reliable and actionable information on costs of processes, products, service lines, channels, missions and customers.
• Reflects the economic realities of the decision at hand, unhindered by external regulatory accounting rules.
• Is consistent with the organization's creation of long-term sustainable value or the long-term execution of the organization's mission.
• Doesn't lead to argument and debate about its usefulness and accuracy.
• Is readily available, sufficiently detailed and logically structured to improve visibility, facilitate analysis and provide insights.

Conclusion:  Decision-making is challenging in all circumstances. Decision-makers, at all levels of an organization, must demand that those providing cost information for their decision-making honor these rights that are essential to effectively execute their management responsibilities.

This approach is essential to enhance the success of your company. There is no excuse for failing to create effective managerial cost information for internal decision-making. The knowledge and techniques to do advanced managerial costing have been available for decades, and today's technology allows multiple financial models of the organization and interconnectivity with operational systems. Financial information needs to step up with new approaches to reflect operational models, collect information that supports operational decisions, and support the creation of value every day and at all levels of the organization.

How do your operational managers view the decision support information provided by finance?

Do you agree with the "Bill of Rights"?

What solutions have you implemented in your organization to improve decision support?

Financial information needs to step up with new approaches to reflect operational models, collect information that supports strategic and tactical decisions, and support the creation of value.

As a financial manager, you have had innumerable discussions (often heated) about the inadequacy of a company's cost information.  Operating managers feel they have been held to unreasonable standards, seen the impact of bizarre allocations, been subject to unrealistic performance requirements, and they have often monkeyed around with the costing model to create some sanity in an insane costing system.

The problem is that the only costing information most accountants create is focused on external financial reporting. Then they try to connect it to operations with variances and standards they learned in college. Though they won't often admit it, most accountants know this information is not useful and often impairs decision-making. The Institute of Management Accountants found in a survey some years ago that 98 percent of financial executives believe the cost information they supplied management to support decisions was inaccurate for decision support. (I think it is unlikely this has changed.)

Business leaders should expect better from the cost information used internally for analysis and decisions. For this information, there is no governmental regulatory agency enforcing rules, so chief financial officers can use any system, analytic technique or practice they find that will support the organization's decisions effectively.  Finance needs to begin listening to the needs of internal customers for increased financial insights for decision support and value creation analysis to become more of a business partner.

A few years ago Raef Lawson, Doug Hicks, Gary Cokins, Monte Swain, and I came up with a "Bill of Rights" concept for Cost Information Users.  You may find it useful: 

Bill of Rights for Managerial Cost Information Users

Definition: Managerial costing supports decision-makers tasked with optimally achieving their organization's strategic objectives. Decision-makers, at all levels of an organization, should be provided managerial cost information that:

• Clearly reflects the causal operational relationships of resources, their capacity and the processes that produce the organization's outputs.
• Calculates and reports reliable and actionable information on costs of processes, products, service lines, channels, missions and customers.
• Reflects the economic realities of the decision at hand, unhindered by external regulatory accounting rules.
• Is consistent with the organization's creation of long-term sustainable value or the long-term execution of the organization's mission.
• Doesn't lead to argument and debate about its usefulness and accuracy.
• Is readily available, sufficiently detailed and logically structured to improve visibility, facilitate analysis and provide insights.

Conclusion:  Decision-making is challenging in all circumstances. Decision-makers, at all levels of an organization, must demand that those providing cost information for their decision-making honor these rights that are essential to effectively execute their management responsibilities.

This approach is essential to enhance the success of your company. There is no excuse for failing to create effective managerial cost information for internal decision-making. The knowledge and techniques to do advanced managerial costing have been available for decades, and today's technology allows multiple financial models of the organization and interconnectivity with operational systems. Financial information needs to step up with new approaches to reflect operational models, collect information that supports operational decisions, and support the creation of value every day and at all levels of the organization.

How do your operational managers view the decision support information provided by finance?

Do you agree with the "Bill of Rights"?

What solutions have you implemented in your organization to improve decision support?

Absolutely agree with your assertion regarding the need for a "Bill of Rights."  A couple of important points you made are apropos...

• The need to create value -- Cost information alone does not define value – your customers and employees do, and the numbers indicate how well your listened.
• The impact of bizarre allocations - At best, allocations are arbitrary and worse they are bizarre.

All conventional costing systems, Absorption Cost Accounting (ACA), Activity-Based Costing (ABC), and Time Driven ABC (TDABC) utilize pooling, averaging and allocations to assign costs to activities and lines of business.  If allocations are the root cause of the inaccuracies, then why continue to use such methods and expect better or different outcomes -- isn't that the definition of insanity?

A simple approach would be for each cost element:

1. What activity is being performed?  Activities defined as Verb-Adjective-Noun.
2. Why is the activity performed? Causation.
3.  How much time or cost is expended for the activity over a business cycle?  The cost and/or effort expended when performing the activity over time.
4. When performing the activity, how much of the activity is being performed for each line of business?  Assigns the cost of the activity to the outputs supported without any averaging or allocations.  This method generates a bi-directional audit trail that facilitates cost validation which cannot be accomplished with any costing system that utilizes pooling and allocations.
5. How do the constituents (customers, employees, etc.)  feel about how well the activity is performed?  Combined with the cost of the activity will assess the value of both the activity and the cost expended.

The following LinkedIn posting will provide further insights regarding the issues cited by Larry White.

https://www.linkedin.com/posts/brianhiggins5_rethinking-managerial-cost-accounting-systems-ugcPost-7308203712999526403-MXA6?utm_source=share&utm_medium=member_desktop&rcm=ACoAAANMjdYBFDMi3T2ScWd2mMtMv5eMTuIJaHE

Financial information needs to step up with new approaches to reflect operational models, collect information that supports strategic and tactical decisions, and support the creation of value.

As a financial manager, you have had innumerable discussions (often heated) about the inadequacy of a company's cost information.  Operating managers feel they have been held to unreasonable standards, seen the impact of bizarre allocations, been subject to unrealistic performance requirements, and they have often monkeyed around with the costing model to create some sanity in an insane costing system.

The problem is that the only costing information most accountants create is focused on external financial reporting. Then they try to connect it to operations with variances and standards they learned in college. Though they won't often admit it, most accountants know this information is not useful and often impairs decision-making. The Institute of Management Accountants found in a survey some years ago that 98 percent of financial executives believe the cost information they supplied management to support decisions was inaccurate for decision support. (I think it is unlikely this has changed.)

Business leaders should expect better from the cost information used internally for analysis and decisions. For this information, there is no governmental regulatory agency enforcing rules, so chief financial officers can use any system, analytic technique or practice they find that will support the organization's decisions effectively.  Finance needs to begin listening to the needs of internal customers for increased financial insights for decision support and value creation analysis to become more of a business partner.

A few years ago Raef Lawson, Doug Hicks, Gary Cokins, Monte Swain, and I came up with a "Bill of Rights" concept for Cost Information Users.  You may find it useful: 

Bill of Rights for Managerial Cost Information Users

Definition: Managerial costing supports decision-makers tasked with optimally achieving their organization's strategic objectives. Decision-makers, at all levels of an organization, should be provided managerial cost information that:

• Clearly reflects the causal operational relationships of resources, their capacity and the processes that produce the organization's outputs.
• Calculates and reports reliable and actionable information on costs of processes, products, service lines, channels, missions and customers.
• Reflects the economic realities of the decision at hand, unhindered by external regulatory accounting rules.
• Is consistent with the organization's creation of long-term sustainable value or the long-term execution of the organization's mission.
• Doesn't lead to argument and debate about its usefulness and accuracy.
• Is readily available, sufficiently detailed and logically structured to improve visibility, facilitate analysis and provide insights.

Conclusion:  Decision-making is challenging in all circumstances. Decision-makers, at all levels of an organization, must demand that those providing cost information for their decision-making honor these rights that are essential to effectively execute their management responsibilities.

This approach is essential to enhance the success of your company. There is no excuse for failing to create effective managerial cost information for internal decision-making. The knowledge and techniques to do advanced managerial costing have been available for decades, and today's technology allows multiple financial models of the organization and interconnectivity with operational systems. Financial information needs to step up with new approaches to reflect operational models, collect information that supports operational decisions, and support the creation of value every day and at all levels of the organization.

How do your operational managers view the decision support information provided by finance?

Do you agree with the "Bill of Rights"?

What solutions have you implemented in your organization to improve decision support?