Why Your Accountant May be Putting You Out of Business
One of the questions I often ask business owners who have a fleet of machines or trucks is …..Who does your costing? I get many different answers to this question. One of the common answers is "My accountant".
Unfortunately for the client, this is a good indication that unfortunately he may be trouble and most likely does not even know it. We have found that if the owner or senior manager of a business is not involved in critical cost decisions, many problems will result.
Our world today is often run by what our accountants tell us. They have a position of great respect in many companies. We pay accountants a lot of money every year. After all, they understand all that financial stuff. They should know best, how to cost machines. Shouldn’t they?
In this newsletter I am going to pick on accountants. If you are an accountant or CFO, please do not be offended. Keep reading and maybe it will help your practice and your clients success.
Seldom will an accountant tell you why his calculation of machine cost numbers are in error! The truth is that he or she may have no clue that what he is telling you is or might be wrong. His training, tools and methods have served him well in the past. Why would they be wrong now with machine cost? He believes in his accounting system. He did the calculations. He knows they are mathematically correct.
The problem with machine cost is that being mathematically correct and being right are two different things. To be right with machine costing you have to be mathematically correct but also you have to use the correct METHOD to get to true cost. This is why we use Dynamic Life Cycle Costing as the only method to know true cost per hour. Most accountants derive cost based on historical accounting records. The problem with using historical cost is that it is seldom correct when it comes to calculating future machine cost. More about that later
Many accountants have attended cost accounting classes but, perhaps as many as 80-90% of accounting students will tell you that their least favorite class was cost accounting. I don’t blame them. Most of the cost accounting classes that I have seen are poor. They are highly questionable as to their applicability or usefulness to the real world. Worse yet, the accuracy of the finished product when applied to machinery cost is in some cases, just plain wrong.
I fully realize that what I am saying may cause some to strongly disagree. It may appear that I am against accountants. I am not. Good accounting is fundamental to business success. Some of my most valued advisors are accountants. If you are a CFO or accountant please bear with me and let me explain.
The problem with standard Historical accounting methods is that it is very poor at calculating true machine costs per hour. Oh yes, these numbers need to be tracked for historic cost and necessary in calculating cost for tax purposes. But tax cost and real cost are two entirely different things. The numbers may be absolutely mathematically correct. The only problem is that they are wrong if you intend to use them for budgeting, estimating, pricing, bidding or tender purposes. If you use the numbers from your accounting system for machine costing purposes, you are setting yourself up for disaster. Maybe not today, but sooner or later it will cost you a ton of money. Maybe even your company, your retirement program and perhaps your children’s future.
Hear are three of twenty reason why historic accounting is not good for forecasting cost.
Many machines are very complex. These complex machines do not have one lifetime. They have a whole group of component lifetimes that start at hour one and expire at different rates or time. The cost in every subsequent year of operation is going to be different than the last. Looking backwards at what happened to cost last year or even over the last three years will yield unsatisfactory machine cost numbers going forward. The older the machine is, the worse this variation becomes.
An easy way to understand this is to think about the car you drive. In the first few years you are in the "honeymoon period" of very few problems once any small glitches from the factory are fixed. In the next few years new problems like brakes battery and alternator may need to be fixed. Fast forward to the 5th to 8th year of ownership and we see all kinds of problems that we did not see in the early years. AC system, power windows, power steering pump, water pump, electronics etc. need attention.
Depreciation for tax purposes often has little to do with real world costs per hour. A machine that has an eight to ten year or more economic lifetime may be written off for tax purposes much faster. What you do for tax calculations often has little to do with reality. This is not illegal. It is smart business practice.
Your actual cost changes. Some examples of changing variables are; fuel cost changes, types of work done with a machine, number of hours of machine use and geological conditions of use. All of these drastically effect cost calculations. Yesterday's cost is not today's cost.
If your accountant is calculating your machine costs here are eight questions to ask him or her about their numbers.
Q1. When you came up with these cost numbers, did you get them based on the accounting books or did you go out to the shop and get the machines’ Owning and Operating Manuals?
If he says he looked in the accounting books, strongly consider throwing out the cost numbers.
Q2. How of much of each track machine’s cost per hour is for undercarriage cost (or final drives, or hydrostatic transmissions)?
If he can’t tell you, strongly consider throwing out the cost numbers.
Q3. How much of each wheeled machine or truck’s cost per hour is for tires cost?
If he can’t tell you, strongly consider throwing out the cost numbers.
Q4. How much of each machine’s cost per hour is for ground engaging tool cost?
If he can’t tell you, strongly consider throwing out the cost numbers.
Q5. Diesel Fuel is one of the biggest expense, when fuel cost change, how does Changing costs affect the cost per hour, mile or kilometer?
If he can’t tell you, strongly consider throwing out the cost numbers.
Q6. How much of this machine’s cost per hour is for future major costs like replacement or rebuilding the engine or changing a hydraulic pump?
If he can’t tell you, strongly consider throwing out the cost numbers.
Q7. How do varying job conditions change your cost per hour or mile?
If he can’t tell you, strongly consider throwing out the cost numbers.
Q8. How many hours or miles/Kilometers is this cost based. What happens if that number changes by this year by 10% or more, up or down?
If he can’t tell you, strongly consider throwing out the cost numbers.
Accurate calculation of your machine cost per hour is critical if you want to know your unit costs like; cost per ton or cubic yard or other units. Your businesses future depends on you knowing cost. Companies that know their cost, stay in business, Companies that don’t know their cost, go broke. This is true for new companies, it is true for companies that are 10, 20, 40, 80 or 100 years old. Your cost is dynamic and constantly changing.
So if you cannot count on your accountant for machine cost, on whom can you count? We have found that good costing of machine is a group effort. Maybe one person heads it up. But getting to true cost involves input from many people both within and outside of your company. Your accountant is as good as anyone to head this effort, providing that he or she has the time and the correct specialized tools. Good costing is like good estimating. It takes time and knowledge to be a good estimator of cost. In most cases it takes the efforts of a dedicated person, who is trained in machine costing. This could be an existing employee.
The correct tools are very important. This is no different than any other job. Seldom will a backhoe do what a hydraulic excavator can do and vice versa. Machine costing takes special tools like DecisiveCost. Spreadsheets can not deal with the required interactions necessary to get to true cost. This is a little like trying to keep company books and accounting with a spreadsheet. It would be a nightmare. (By the way, we have developed a test, if you think your spreadsheet is ok to use to cost machinery. Send me an e-mail and I will send you the spreadsheet test.)
Your machine cost is your cost. You cannot get accurate or dependable numbers out of some book or web site. You have to calculate cost per hour for yourself. There is just too much variation in cost per hour between machine owners. With DecisiveCost you can cost a truck or machine in two minutes or less, once you have set the system up. That book number is somebody’s cost but it is not your cost. After working with thousands of people in over 81 different countries, I can say with some authority that every company’s cost of a machine or truck is unique to that company and the type of work they are engaged in doing.
DecisiveCost is not an accounting system, or a maintenance management system it is a Dynamic Lifecycle Costing system. It is very unique. If you have questions about the accuracy of your current machine costing methods, call me or e-mail me. I can help you. Better yet, I will make you a lot of money and help assure the future success of your business.
Dedicated to your success,
Dan Rooks
President
Decisive Systems, Inc.
"The Owning and Operating Cost People"
In the U.S. Call 800-232-5767I
nternational 941-926-9260
drooks@decisivecost.comhttp://www.decisivecost.com/
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