Please forgive me for my persistent rant and criticism against accountants who budget poorly or continue to calculate the substantial and growing high indirect and shared costs originating from resource expenses such as salaries, supplies, power, information technologies, and travel. I cannot seem to hold back my frustration. 

When I observe managerial accounting practices and methods that ignore driver-based budgeting principles or simply allocate indirect and shared expenses typically as large combined “pool” using a single broad-brushed cost allocation base (e.g., number of units produced, sales amounts, direct labor input hours, head count, square feet/meters), I do not know if I should laugh or cry!

An excellent reference for best budgeting practices is this “Budgeting Best Practice e-book” written by Alan Whitehouse, Chief Solution Architect with TrueSky Inc. It is at:

A paradox which continues to puzzle me is how chief financial officers (CFOs) and controllers can be aware that their managerial accounting data is flawed and misleading, yet not take action to do anything about it.

Now, I’m not referring to the financial accounting data used for external reporting; that information passes strict audits.

I’m referring to the managerial accounting used internally for analysis and decisions. For this data, there is no governmental regulatory agency enforcing rules, so the CFO can apply any accounting practice or cost allocation method that he or she likes.

Narrowing the gap between marketing and finance

As I stated in the opening to this article, there can be wide gaps and personality differences between the function of the CMO and CFO.

But maybe a paradigm shift can effectively eliminate that gap. Marketing thinks to act locally for global impacts to increase sales. Accounting thinks to take actions that lift the most profitable sales. Their common focus is what actions to take.

Position your accounting and finance team to provide marketing with the insights for making the best decisions – in this example, by identifying your most profitable customers – while marketing takes action to weight their efforts toward those insights is the ultimate win for both teams and your business.

Later that week Sandy and Jim bumped into each at the water cooler. Sandy confirmed with Jim that her team would have the profitability by customer report to him by the end of the week. Jim was thankful and assured her his team would use the report’s insight to position their product most effectively in the store and maybe “change the color of our kitty litter”

A paradox which continues to puzzle me is how chief financial officers (CFOs) and controllers can be aware that their managerial accounting data is flawed and misleading, yet not take action to do anything about it.

Now, I’m not referring to the financial accounting data used for external reporting; that information passes strict audits. I’m referring to the managerial accounting used internally for analysis and decisions. For this data, there is no governmental regulatory agency enforcing rules, so the CFO can apply any accounting practice or cost allocation method that he or she likes.

Perils of poor navigation equipment

Perhaps some CFOs and controllers are simply lazy. They do not want to do any extra work or have two sets of books with potentially confusing product and service-line cost numbers. This counterintuitive phenomenon can be described this way:

Imagine that several centuries ago there was a navigator who served on a wooden sailing ship that regularly sailed through dangerous waters. It was the navigator’s job to make sure the captain safely and efficiently sailed the ship from one point to another. In the performance of his duties, the navigator relied on a set of sophisticate

If Hollywood can make sequels to movies, why can’t I? This article is my sequel to my previously published “Can Accountants Grow the Beans Too?” article.

Here is an edited excerpt of an e-mail to me from an accountant I have known for years. His name will remain anonymous for his own protection.

I left my job with Xxxxx. Most of the VPs there did not understand strategy execution or managerial accounting. A few others and I tried to spread the word for about two years. It was just always a struggle to get buy-in for strategy execution, a balanced scorecard, dashboards or driver-based budgeting and rolling financial forecasts. Our guys weren’t really interested in profitability modeling or using any activity-based costing. I tried to do one driver-based budgeting project, but the accounting software could not handle it. It is sad.

What can be said after reading his note? My intent is not to alienate some readers or exhibit the inflammatory and uncivil rhetoric and language we have been reading about the media and politicians in the USA. I simply want to illustrate (again) that the field of accounting will eventually need to deal with

The reputation of CPAs, perhaps exaggerated, is that they are precise, introverted, and conservative. Whether they are employed by a public auditing firm or by an organization, a CPA’s traditional responsibilities have been financial stewardship and assurance of financial accounting compliance with regulatory and tax agencies and typically report past historical data.

Generally, CPAs have not had a reputation for deep involvement with operations and sales management nor being a strategic advisor to their executive team, although articles by the media, consulting firms, and IT analysts have been claiming this is a trend and direction for them.

Are the claims becoming reality?

Maybe there is now a glimmer of change. Perhaps CPAs are increasing in numbers with their transition to expanding from being primarily financial accountants to managerial accountants. I have some evidence for this.

Here are some impressions I have from presenting at AICPA financial planning and analytics (FP&A) conferences in the US. (As many are aware the AICPA and CIMA created an alliance, the CGMA. I have authored two CGMA books). A first sign of change of this transition from “bean counter to bean grower” is that the number of conference attendees at AICPA FP&A conferences is increasing.

The popular New York City Broadway musical Hamilton has drawn attention to the founders of the USA who wrote the USA’s Declaration of Independence in 1776. Subsequently in 1789 the USA’s Constitution became the supreme law. The first ten amendments to the Constitution, known collectively as the Bill of Rights, declared specific protections of individual liberty and justice, provided guarantees of personal freedoms and rights, and placed restrictions on the powers of government.

Today the users of management accounting information deserve a similar “bill of rights”. Most users feel underserved by their CFO and accountants with flawed and misleading information and a lack of visibility and completeness in the information. Some managers and executives feel oppressed by their CFO and accountants.

A CFO or accountant with an MBA is not enough to fully appreciate what it is like to walk in the shoes of a CMO, VP of sales, or VP of operations. As CFOs take more time to understand the goals and processes of these functions, they will cross that bridge to become the strategic advisor and contributor that so many magazines proclaim that CFOs already are. They will be vanguard CFOs.

Why would accountants who appear to be genetically born to seek precision, accuracy and detail rely on creating and worse yet using flawed information? My belief is System 1 thinking, which is quickly accepting that their cost information is perfectly correct (because it reconciles with their firm’s total expenditures), is distracting the accountants from the deeper understanding of what they are doing.

For many accountants there is confusion and a lack of consensus with how to allocate costs to products and service lines. I refer to this as “a mystery in a box to accountants”. To solve this mystery here are three lectures to accounting professionals and students from a skilled and experienced accountant – me – that explains the problem and how to solve it. Even if you believe you have already ‘graduated’ from a “Cost Accounting” course in college or have a CPA, I encourage you to sit in the back of our virtual lecture hall and audit these three lectures.