We’re about to begin 2014, nearly three decades since the dangers of using traditional – especially direct labor-based – costing methods to develop decision support and performance measurement information were clearly documented by the likes of Kaplan, Cooper and Johnson.   Since then a vast body of knowledge and experience has been accumulated, documented and liberally disseminated, including solutions to the “costing problem” for organizations of any size and in any industry.  Yet as we enter 2014, a vast majority of organizations continue to use over-simple and outdated costs models that provide their decision makers with an irrational jumble of nonsense – disguised as cost information – as support for making decisions critical to the survival and growth of their organizations.

Why has the adoption of 21st Century costing practices proceeded at the speed of continental drift?  The reasons suggested are many, ranging from the academic community’s emphasis on financial accounting to conservative bean counters’ resistance to change.  After twenty-eight years as an advocate for these new practices, I’ve found there to be one major cause underlying all the others; decision makers are ignorant of the fact that they have a serious problem. Although many decision makers understand that the cost information provided by their accountants is seriously flawed, they have had to work with such cost information for so long that they have developed coping mechanisms and “rules of thumb” that they believe work and in which they have developed a great deal of confidence – confidence that is usually misplaced.  In other words the supply of powerful new ideas in cost management has run far ahead of the demand for those ideas.

The most frequent answer accountants give me when I ask them the question “How come you’re still using outdated costing practices that you know don’t fit your business?” is “No one has told me that I have to change them.  Management seems to be happy with what we’ve got.  I’m not about to take the initiative and add to my workload in order to fix something the boss doesn’t think is broken.” Financial and accounting professionals are accustomed to making changes to comply with new or updated rules and regulations; changes that are required by law.  Unfortunately, there is no law requiring accountants to provide their management with accurate and relevant decision support information.

Costing professionals like members of SCM can sit around and debate the pros and cons of ABC, RCA, GPK, Lean Accounting or any other new concept until they’re blue in the face, but if management is not made aware of the dire economic consequences that result from using flawed cost information to support critical decisions, it’s all just an academic exercise.  Until we begin turning our attention outside of our own narrow community and focus our efforts on having decision makers increase the demand for quality decision cost information, we might just as well work on new designs for dial phones or buggy whips.

 

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