The Long Arc Bends Toward Justice
By Gary Cokins, President, Analytics-Based Performance Management LLC (www.garycokins.com)
Many CFOs and accountants are still in the 1970s. How do we get them into the 21st century by applying and using progressive management accounting methods?
Martin Luther King, Jr. said that "the arc of history is long, but it bends toward justice." The origin of this sentence can be traced to Theodore Parker, a Unitarian minister and prominent American Transcendentalist, born in 1810. Parker called for the abolition of slavery in the USA in a 1853 collection of “Ten Sermons on Religion”.
The problem begins with an imbalance in emphasis, with external statutory and compliance financial reporting for government regulatory agencies (e.g., the USA’s SEC) dominating over internal management accounting. The purpose of the former is for “valuation” (e.g., inventories, cost of goods sold), whereas the latter’s purpose is for “creating financial value” for shareholders and owners by providing insights for better decisions. Most CFOs and accountants place their emphasis on the former rather than the latter.
Justice and Management Accounting
The word “justice” is in the quote above and the title of this article. Synonyms for justice are fairness, honesty, and righteousness. My message here is that an organization's executives and line managers (e.g., sales, marketing, operations, supply chain) deserve much better financial information from their accountants. The accountants typically provide flawed and misleading management accounting information. The accountants are underserving their managers. It is borderline irresponsible.
For example, many CFOs and accountants take the convenient route when allocating indirect expenses (commonly called “overhead”) to calculate product or standard service-line costs. They allocate expenses (e.g., salaries, purchases) into costs like “spreading butter across bread”. They use broadly averaged cost allocation factors that violate costing’s universal causality principle. Examples of these cost allocation factors include sales volume, number of employees, square footage, and number of direct labor hours. There is no cause-and-effect relationship! The result is that their calculated costs are substantially inaccurate compared to reality. Yes, they reconcile exactly with external financial accounting, but they are wrong in the details. (Activity-based costing [ABC] resolves this problem.)
Hope versus Optimism
We need to distinguish a difference between hope and optimism.
Optimism is being confident in the future. It is the belief that things will eventually be alright, satisfactory, and positive. Hope, on the other hand, is the feeling that something wanted and desirable might happen. Hope is an aspiration of a good outcome that overcomes barriers and obstacles.
So, what are those barriers and obstacles? A major one is human behavior’s natural resistance to change. Most people like the status quo – the current state. Another barrier is the belief that the benefits of applying progressive management accounting will not exceed the additional administrative effort required to calculate the costs. That is, it is just not worth the trouble. Sadly, this barrier stems from accountants' misunderstanding that applying progressive management accounting methods is too complex. It is not. (To learn why is not, search for the term “rapid prototyping implementation”.)
I opt to advocate optimism. We know that the arc is long, but it will bend towards justice. Executives and managers will eventually receive the valid, reliable information they deserve from their CFOs and accountants.
Remember this. In the land of the blind, the one-eyed man is king.
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ABOUT THE AUTHOR
Gary Cokins, CPIM
gcokins@garycokins.com; phone 919 720 2718
http://www.garycokins.com
Gary Cokins is an internationally recognized expert, speaker, and author in enterprise and corporate performance management improvement methods and business analytics. He is the founder of Analytics-Based Performance Management, an advisory firm located in Cary, North Carolina at www.garycokins.com . Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA with honors from Northwestern University’s Kellogg School of Management in 1974.
Gary began his career as a strategic planner with FMC’s Link-Belt Division and then served as Financial Controller and Operations Manager. In 1981 Gary began his management consulting career first with Deloitte consulting, and then in 1988 with KPMG consulting. In 1992 Gary headed the National Cost Management Consulting Services for Electronic Data Systems (EDS) now part of HP. From 1997 until 2013 Gary was a Principal Consultant with SAS, a leading provider of business analytics software.
Two of his more recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics, and Predictive Business Analytics. His books are published by John Wiley & Sons.
https://www.linkedin.com/in/garycokins
All of his books are at:
https://www.goodreads.com/author/list/47692.Gary_Cokins