The goal of managerial costing is to inform management. Costing that confuses, hides, distorts, or implies many digits of accuracy is fraudulent from the perspective of management information.
An Example That Fails to Inform
The illustration represents the first effort of a child care supervisor to show her costs for December, a comparison to plan, and plans for January and February. Imagine being given this report by a subordinate of yours who then says, “Here is my report. Are there any questions?”
Would you start deconstructing the numbers to search for hidden intelligence? Or would you assume that the presenter had already done so and there was nothing of much interest here?
We will save the questions for another blog referenced below and critique this report solely on the basis of its managerial usefulness. There is a wealth of useful information buried in the numbers shown, but it is not readily apparent.
The report seems to be compliance with a reporting requirement. I’ve seen many such reports where the presenter seems to be trying to overwhelm the boss with a lot of numbers.
I did this once myself while a young controller in a presentation to a very senior manager. I put up something like a ten by twenty matrix of numbers thinking he would be impressed by my thoroughness and the volume of data. He was not impressed and taught me a valuable lesson by asking questions about individual data points in the matrix that really had no relevance to the point of the slide.
My first reaction to the illustration shown is that it is hard to read. The numbers are small while there is a lot of white space. Couldn’t the unused spaces be dropped from the report and a bigger font used?
Now it is logical to think that this is a printout of an excel file and excel is excellent at adding numbers. However, the number of 11987 in the third column is 500 more than the numbers above it. The difference or variance between columns one and two is 11987 so something else is wrong. (Making sure numbers add vertically and horizontally is called “cross footing.”)
The report also shows a lot of numbers. Some are small and insignificant. Others are large and significant. Showing insignificant numbers detracts from the underlying story behind the numbers. There are also five digits of data shown in many numbers which raises the question:
How Many Digits of a Number Should be Shown?
Imagine if this report had shown all numbers to the penny instead of to the dollar. Would the extra data be of any possible managerial value? Absolutely not! All those extra numbers would actually make the numbers harder to understand. So is the case with showing these numbers to the dollar. Showing $K with one digit after the decimal would be much easier to grasp.
Consider two numbers: 123456789 and 98765432. Which is bigger and by roughly how much? Is it clear to you and immediately perceptible that the first number is 25% greater than the second? Wouldn’t restating the numbers to 123M and 99M make it clearer? Our goal as a managerial coster is to make things clear and adding more digits to numbers does the opposite.
How many digits make any significant difference? If the first two are correct that is 99%!
Much costing involves a distribution or allocation relies on an assumption of how much goes to each component. Numbers with assumptions are inherently estimates and purporting five digits of accuracy is truly fraudulent misrepresentation of fact.
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