Traditional accounting tools are hapless in supplying useful managerial information in 21st century firms where direct costs are an ever-decreasing percentage of total cost.

1. 4/28/2016 1
Should Your Marketing Manager be doing
Your Cost Accounting?
Traditional Managerial
Accounting Tools are
struggling to be relevant in the
modern economy.
Determination of cost is a
good example.
Just what is a managerially
useful depiction of unit cost
when most spending is fixed
or indirect?
Cost of
Goods Sold
Direct
Costs
$200M
$1M

2. 4/28/2016 2
Should Your Marketing Manager be doing
Your Cost Accounting?
A firm’s Marketing
Department(s) may have cost
knowledge and information
that is more relevant and
useful than does the
Accounting Department -- and
these Marketing personnel
probably don’t even know it!

3. Exactly correct but entirely irrelevant. An accountant?
Financial Accounting = Rule-based reporting to investors
Tax Accounting = Rule-based reporting to the authorities
Managerial Accounting Business Modeling = Do what the
business requires – be cognizant of context; be relevant
and accepted by all elements within the business
[Managerial Accounting is also called Cost Accounting]
Oxymoron: an
accounting joke
4/28/2016 3
Should Your Marketing Manager be doing
Your Cost Accounting?

4. 4/28/2016 4
Financial
(rule-based)
Tax
(rule-based)
Managerial
(free form)
Managerial Accounting needs to be relevant…it must effectively model the
business. Managerial Accounting should take primacy over Financial and Tax
Accounting. Some/many Financial Accounting and Tax Accounting rules may be
disregarded by the Managerial process (and accounted for after-the-fact).
Financial vs Tax vs Managerial Accounting

5. Should Your Marketing Manager be doing
Your Cost Accounting?
Consider a new 10 nanometer
semiconductor fab:
• $10B of Capital (!)
• Lights Out Manufacturing – almost
no direct labor
• Significant maintenance and other
indirect labor
• Small direct materials costs as % of
total
4/28/2016 5

6. Should Your Marketing Manager be doing
Your Cost Accounting?
4/28/2016 6
In this scenario, traditional accounting
is almost entirely an exercise in
allocating depreciation and overhead
to volumes in an arbitrary manner
Useful?
Does this support good decision-
making?

7. Should Your Marketing Manager be doing
Your Cost Accounting?
The divergence of Managerial need
versus Rule-based Accounting methods
is large and growing.
This is everybody’s future: ever-smaller
% of costs that vary directly with unit
volume. So, what is the “Cost” of
running a wafer through this fab plant?
Sidebar: If direct costs still predominate in your company, are you
behind technologically? Are you an easy competitive target?
4/28/2016 7

8. 4/28/2016 8
Should Your Marketing Manager be doing
Your Cost Accounting?
The overwhelming “cost” in this 10 nanometer semiconductor fab is for
capacity. These costs are largely fixed. There’s almost no correlation between
the true costs of capacity and factory volume, at least as traditionally measured.
The true cost of committing or utilizing capacity is an Opportunity Cost – i.e.,
capacity becomes unavailable for other uses. What are these other uses?
Who is most knowledgeable of these other uses?
Opportunity Cost, where there’s a capacity shortfall, is cash margin
generated (foregone) per scarce unit of capacity.

9. Should your Marketing Manager be doing
your cost accounting? YES, or at least have
involvement
Managerial Accounting is too important to
be left to the Accountants!
4/28/2016 9
Should Your Marketing Manager be doing
Your Cost Accounting?
Who is most knowledgeable of these other uses of Capacity?
Your Marketing Manager!

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Forecast Plant Loading vs Capacity
Capacity
Forecast Loading
4/28/2016 10
Should Your Marketing Manager be doing
Your Cost Accounting?
Excess Capacity
Capacity Shortfall
Consider:
Build-Ahead
Build-Ahead

11. 4/28/2016 11
Should Your Marketing Manager be doing
Your Cost Accounting?
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Forecast Plant Loading vs Capacity
Capacity
Forecast Loading
The Marketing Manager(s)
(or Department), by virtue
of owning the Forecast
Loading line and Pricing, is
defining the Capacity Cost.
Opportunity Cost per unit,
where there’s a capacity
shortfall, is cash margin
generated (i.e., foregone)
per scarce unit of capacity.

12. 4/28/2016 12
Should Your Marketing Manager be doing
Your Cost Accounting?
Can Opportunity Cost be
Measured/Forecasted?
Can Opportunity Cost be
integrated into a Firm’s
Everyday Management
Information and Routines?
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Forecast Plant Loading vs Capacity
Capacity
Forecast Loading

13. 4/28/2016 13
Should Your Marketing Manager be doing
Your Cost Accounting?
Organizational Design complicates things further…
Plant A
Plant B
Plant C
Cost Centers Profit CentersProfit Centers
#6
#7
#8
#1
#2
#3
#4
#5
• Profit Centers and Cost Centers are distinct
• Each P&L Center likely has its own Marketing Manager
• Traditional managerial accounting tools are hapless
• How do you “charge” a Profit Center for Capacity Costs?

14. 4/28/2016 14
Should Your Marketing Manager be doing
Your Cost Accounting?
So, how do you “charge” a Profit Center for Capacity
Costs?
How do you construct business information and
processes that create the correct
incentives/disincentives, while being understandable
and manageable?
One approach: don’t explicitly charge the Profit
Centers at all.
No Charge? It’s Free?

15. 4/28/2016 15
Should Your Marketing Manager be doing
Your Cost Accounting?
Charge Profit Centers only for the that small amount of direct cost. Ration
constrained capacity via the Available-to-Promise (ATP) and Order Promising
functions -- i.e., Ration based upon cash margin per scarce unit of capacity.
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CAPACITY SUPPORT FOR PROFIT CENTER #1
Contractual Strategic Rationed
Capacity is constrained
starting in July. This profit
center (i.e., #1) has poorer
margins per unit of scarce
capacity than do other profit
centers competing for
capacity and consequently
receives diminished support
Capacity Constraint
deemed to start here

16. 4/28/2016 16
Should Your Marketing Manager be doing
Your Cost Accounting?
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CAPACITY SUPPORT FOR PROFIT CENTER #1
Contractual Strategic Rationed
Capacity Constraint
deemed to start here
This particular approach may or may not work for a particular business – or maybe
not for any business – but demonstrates a departure from traditional accounting-
based managerial approaches. In other words, the generalization is the point
Can existing ERP / ATP
(Available-to-Promise)
tools accommodate?