How to implement an effective new cost accounting system

Cost accounting systems can help companies accurately cost products, provide valuable operational and financial information, and even measure performance.

For such systems to be effective and create a high return on investment, it’s essential for financial leaders and other stakeholders to devote time to designing and building one tailored to their organization. Otherwise, a new system may not adequately address a company’s key business objectives.

The challenge

Having an effective and efficient way of capturing and monitoring product cost is critical for manufacturers. However, cost accounting systems are often inefficiently established and managed by the financial leaders who rely on them.

The reason for this oversight is simple. Cost accounting system functionality, management, and implementation isn’t part of normal, day-to-day business considerations.

By conducting due diligence prior to a new cost accounting system’s implementation and taking into account a few other key considerations, this common pitfall can be avoided.

Due diligence

A business process owner’s goal is to make the most of their cost accounting data, using it to effectively manage business operations and measure the performance of each department involved in the manufacturing process.

The reason why cost accounting systems often fall short on this objective is typically inadequate due diligence. This lack of preparation results in the following:

• Incomplete data around the functionality and capabilities of an existing system
• Unreasonable expectations
• Incomplete preparation for a new system

Establish clear objectives

Unclear objectives cost companies money, time, and effort — and often result in cost accounting systems that can’t meet key business objectives. For this reason, management should refrain from selecting a system and designing a new cost accounting process until clear objectives for implementing a new system are established.

Project owners often have a clear understanding of their cost structure and what they want from their cost accounting system. The difficulty lies in accounting for these objectives when designing a new cost system.

Management may want to report and monitor product cost by brand, for example, but they may not design their system or process in a way that common costs incurred at each stage of production are allocated appropriately to achieve this objective.

It’s also essential to consider how a new system will capture purchasing or production data to provide meaningful, actionable information. Leadership may want a performance-based system, for example, but if that objective isn’t clearly established at the outset of the implementation planning process, the new system may not include a methodology for measuring performance against agreed upon benchmarks — and it may not be designed to adequately capture the necessary purchasing or production data.

Assess existing systems

It’s also critical to evaluate the capabilities of a company’s existing cost accounting system to handle the accounting requirements of the organization’s current needs, near-term anticipated changes, and long-term objectives. In this way, management can make sure the existing systems will be capable of handling the new process.

By looking at the current cost accounting system’s capabilities — which are nearly always underused — the decision can then be made to either change to a new system or design a process to address the current system’s limitations.

Determine supporting business processes

It’s important to revisit the supporting business processes as well, to make sure the activities needed to support the effective operation of the new cost accounting system have been considered in the design.

Project owners must consider whether existing resources are sufficient, and if they’re capable of supporting the new processes and systems, monitoring them, and evaluating the data needed by management.

Ambiguities and outliers in current system capabilities should also be addressed. Only then should the costs of implementation — in dollars, time, lost productivity, and future gains — be considered.

Next steps

When considering a new cost accounting system, it’s important for project owners to have clear answers to the following questions:

• Does the current system provide the operational and financial data reporting you need and want? If yes, will the existing operational and financial reporting processes need to be changed? If not, is there latent functionality in the current system that can be updated or turned on?
• Will a new system be capable of implementing the proposed cost accounting process? If so, do you have a clear objective for implementing the new cost accounting system?
• Did you consider the changes in the supporting operational and financial reporting processes as a result of implementing a new cost accounting system?If so, did you evaluate whether the existing personnel have the skills and capacity to support the new processes?
• Can you or will you allocate enough time to know the capabilities of the new system? If so, have you considered the key personnel that need to be included in the training and is that training included in the project implementation timeline?