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To what extent are you attached to your costing method?

Christian Babbini

Christian Babbini
Founder and Vice President, Strategy

During a recent costing consultation for a company, I came to a number of realizations. Among them, the astounding number of Excel files involved, the need to review certain drivers but, above all, the misconceptions about what costing should be. How about you? How do you perceive costing?

How many costing methods do you think there are? To be honest, I’m not sure myself. There is always some bright person coming up with some new method that, in actual fact, is not really new. Novelty is the sugar-coating of the marketing world.

I have been doing costing for the past 25 years – giving and attending conference-workshops, taking part in panel discussions and research groups on the topic – and I can tell you that, year after year, it is pretty much the same thing. In the end, costing is not rocket science. All you need is plenty hard work, a bit of imagination and some basic common sense.

Why am I writing this column on costing? Is it because I’m another one of those people who have “invented” a new method? Actually, no. The truth is, my last mandate at a manufacturing company made me realize just how many misconceptions there are about this topic, none of which are related to the costing technique people have chosen.

Here’s what happened last time: I met with the heads of finance, operations and costing. I visited the necessary facilities. I wrote a report laying out all the issues and recommendations regarding the company’s costing. But! When I presented my report, I realized that my message did not pass over well! Perturbed, I asked to meet the head of finance one-on-one in order to understand why my message did not get across.

At some point during my discussion with this person, I realized that Finance wanted me to tell them about THE costing method they should be using. Complicating the matter even further, it seemed that upper management had a specific method in mind. Since I had not in fact mentioned THAT particular method, the finance people were having trouble selling their idea of revamping their costing to the upper management. In fact, the “wind of change” that management wanted to hear about was ‘process costing’. Without wanting to offend anyone, that method (which is nothing more than the old-fashioned ‘’bill of materials” with a “routing”) is as old as … the accounting profession itself! I certainly do not mean to dismiss outright all the innovations and ideas that have been developed over the past few years. However, the real improvement during that time period has been in the smarter use of costing, not in new and improved costing methods.

When I realized the reason people were reacting negatively was because of their preconceptions rather than any problem with my recommendations, it was easy to get their project moving forward again.

The take-away from this, as is the case with many situations at home and at work, is the importance of communicating with and learning about the perceptions and previous the experiences of people who have a significant impact on their decisions. This is why I often recommend the “no-name brand” costing method. At the end of the day, your costing method should accurately take the pulse of your organization and enable you to fully grasp the relevant issues and objectives. If it doesn’t, you could get involved in something that does not meet your needs, or you may end up frustrated at having invested so much time and money in something that doesn’t give you what you want.