COSTING -A Vital element of internal control mechanism

Graphs and Charts Report with pen
Graphs and Charts Report with pen

Having a proper inventory accounting and linked product wise costing system is not only about profitability analysis, strategic planning and effective decision making, it is also about “EFFECTIVE CONTROLLING “ the performance of the business.

Large enterprises pay millions to enjoy the benefits of the controllability function in SAP ERP especially when the ownership and management of the SBUs is separated across countries.

But when a company cannot afford such SAPs and Oracles, it makes sense to adopt at least a costing module as an effective means to control the business. It could be done at a fraction of cost of the sophisticated ERPs.
And it would certainly make more sense to adopt an activity based costing module, at least, in major areas.
The process of standard versus actual consumption analysis, department wise expense analysis based on activity level, product wise profitability, done regularly on a month to month basis, can almost guarantee the identification of the bottleneck operation or the inefficient link in the process/product/personnel value chain or any casualties of operational hiccups/frauds/negligence The business decision makers can have the entire operational chain performance picture delivered via the costing module itself.

In fact costing becomes a sort of internal control mechanism operating within the company

Costing system ,if well designed and well implemented, can peel off the layers of ambiguity in the large pool of financial data and show a focused picture of the company, which can be drilled down to unit level instantly.
In the course of my practice, I often meet clients in the SME sector who consider the costing exercise as a wasteful expenditure and cite the common excuse that their product mix and price is market-led and a rough estimate of cost will suffice.

But my question –Can you afford to overlook the ‘control function ‘in the costing process specially when your business is so vulnerable?

Comments invited.

Jamila Lokhandwala
ACMA(London-Cima),CGMA,ACMA(India-Cma),Mcom
email : jamilakap@gmail.com
blog : managementconsultingguide.blogspot.com

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