Bringing IT in line with the business is a challenge that many organisations are addressing today, but IT is not the only part of business that has strayed away from helping the organisation perform its primary goal - making money.

How effectively is the financial department performing to affect better business practices? The 10 costing commandments that are often religiously followed need to be readdressed and rethought so that the financial department can also be brought in line with business.



1st Commandment: Thou shalt close the books every 30 days whether you need to or not

What benefit do these results offer the business once they have been released? Do the results allow for easy business analysis? Can any business decisions be made from looking at the month-end results? How does the month-end results impact on the costing process? Are these results simply being churned out because it has always been done that way?



2nd Commandment: Thou shalt have only three cost elements - material, labour and overhead

A major problem with all of the 10 costing commandments is a lack of understanding and a gross over-simplification. In the current business environment, overhead is growing rapidly, while material and labour are declining. To perform accurate costing it is necessary to delve much deeper into what makes up the material, labour and overhead cost elements.



3rd Commandment: Thou shalt place absorption of overhead before understanding overhead

What good is this if the overhead is simply absorbed mechanistically, with no attempt at understanding it? Overheads should be analysed and understood to enable accurate and effective absorption.



4th Commandment: Thou shall be precise to the right of the decimal point and not relevant to the left

Accurately inaccurate describes this commandment well. Financial statements, cost elements and overhead absorption are done using the wrong methods, with no understanding, for a simplistic business environment, and the decimal point is placed precisely. Is it at all important that if the figures are inaccurate, where the decimal point goes in is irrelevant?



5th Commandment: Thou shalt place direct labour and factory costs before all others

Mechanisation and automation in today's business world have created an environment that has a great deal less direct labour, and a great deal more indirect labour and other costs that make up a substantial portion of a company's expenses. Why should this commandment still be followed when it was clearly written for an environment that no longer exists?



6th Commandment: Thou shalt never be without Excel for the preparation of the strategic plan

Strategic planning needs to involve more than the creation of a spreadsheet. There needs to be an understanding of the business. Accounting and costing is no longer simply about number crunching. It is about understanding and applying this understanding to the numbers being crunched so that the business benefits.



7th Commandment: Thou shalt determine praise on the basis of favourable variances from standard costs

What happens if this standard cost is applied inaccurately? Could it not create a situation where someone who has under-performed is praised for a job perceived to have been done well, when in reality this is not the case?



8th Commandment: Thou shalt expense it if it moves and capitalise it if is sits

Today, there are many elements in business that do not simply fit into the moulds of 'expense' or 'asset'. What would research and development be classified as? Would intellectual property be an asset or an expense?



9th Commandment: Thou shalt place inventory valuation before decision-making

When stock is taken and a value assigned, how is this information being presented to the business so that effective decisions can be made? Does this inventory value easily show whether that stock is being sold correctly, or whether there is any other method through which it could be sold?



10th Commandment: Thou shalt wait for a new tax law or bankruptcy to implement a new cost accounting system

The point is: how long will accountants continue to blindly follow these 10 costing commandments simply because that is the way they have always done things? At what point will they stop and reconsider the value their work brings to the business? When will accounting be brought in line with the business? Will it take some major catastrophe before they realise they need a new accounting system that has understanding at its core?

Accountants should no longer be mere bean counters. Costing is not only about looking back, but also applying the knowledge of the past to the future. When costing, accountants should be asking themselves: why am I doing this and how can the results be best presented and used for the business?

* Cortell wishes to acknowledge that it drew on various sources and public domain information, all of the sources anonymous or untraceable, in the compilation of this article.



For more information contact Greg Bogiages, Cortell Consulting, 011 783 8504, gbogiages@cortell.co.za